Category: Startups/Entrepreneurs

Gross Firm Openings Flat Since Late 2003

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The Business Employment Dynamics (BED) data set produced by the Bureau of Labor Statistics reports gross changes in employment and firms on a quarterly basis. Several weeks ago, this blog reviewed gross changes in employment and found that job creation declined during the Lost Decade. As a result, the net change in jobs was decided by the level job layoffs or closures rather than job creation at new or existing firms.

This post will provide insight into the recovery from the past two recessions from the perspective of firms. It will look at gross openings and closings, a subset of gross firm gains and losses. Gross openings include new firms, firms that have been inactive, and seasonal firms. As such they include entrepreneurs and others. Gross closings include firms that are ceasing operations permanently, temporarily, or on a seasonal basis.

The following analysis shows Colorado gross opening and closings with averages for the following periods.

• Q1 1993 to Q4 2000 (32 quarters or 96 months).
– In this period of expansion, gross firm openings exceeded gross firm closings in 31 of the 32 quarters.
The 1990s were a period of innovation and growth. There was significant job churn. Gross firm openings and closings increased at similar rates and were highly correlated.

• Q1 2001 to Q2 2003 (10 quarters or 30 months).
– In this period of decline, gross firm openings exceeded gross firm closings in 9 of the 10 quarters.

• Q3 2003 to Q1 2008 (19 quarters or 57 months).
– In this period of recovery, gross firm openings exceeded gross firm closings in 16 of 19 quarters.

• Q2 2008 to Q4 2009 (7 quarters or 21 months).
– In this period of decline, gross firm closings exceeded gross firm openings in 6 of the 7 quarters.

• Q1 2010 to present (7 quarters or 21 months).
– In this period of recovery, gross firm gains exceeded gross firm closings in 4 of the 7 quarters. The average of gross firm openings has been flat since Q3 2003. The deciding factor in net firm change was the decline in the number of gross firms closed.

Since 2003 the average number of gross firms opened has remained flat. The average number of gross firms closed determined whether the net change was positive or negative. This lack of firm openings explains why the job recovery from both recessions has been so weak.

©Copyright 2011 by CBER.

Slow Recovery Driven by Lack of Job Creation

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Most employment data sets report net jobs gains (gross job gains minus gross jobs losses). The Business Employment Dynamics (BED) data set produced by the Bureau of Labor Statistics reports gross changes in employment on a quarterly basis and provides insight into the recovery from the past two recessions.

Gross job gains occur when jobs are added by existing companies (openings) or new companies (expansions). Gross job losses occur when companies lay off some of their workers (contractions) or all of their workers (closings).

In the chart below the light blue lines represent quarterly totals for job gains and the light red lines represent quarterly totals for job losses. The data covers from Q3 1993 through Q3 2011 (this is the most current data).

Average gains and losses are calculated for the periods of expansion and decline. The heavy horizontal blue lines represent average gross gains for the period and the heavy horizontal red lines represent average losses for the period.

The following analysis shows Colorado gross job gains and losses with averages for the following periods.
• Q1 1993 to Q4 2000 (32 quarters or 96 months).
– In this period of expansion, gross job gains exceeded gross job losses in each of the 32 quarters. The

1990s were a period of innovation and growth. There was significant job churn. Gross job gains and gross losses increased at similar rates and were highly correlated.
• Q1 2001 to Q2 2003 (10 quarters or 30 months).
– In this period of decline, gross job losses exceeded gross job gains in 8 of the 10 quarters.

• Q3 2003 to Q1 2008 (19 quarters or 57 months).
– In this period of recovery, gross job gains exceeded gross job losses in all 19 quarters. The average job gains for the previous decline were similar to the average job gains for the recovery. The average level of job losses, layoffs or closures, determined whether the net change was positive or negative.

• Q2 2008 to Q4 2009 (7 quarters or 21 months).
– In this period of decline, gross job losses exceeded gross job gains in all 7 quarters. Gross job losses rose significantly while job creation took a nosedive.

• Q1 2010 to present (7 quarters or 21 months).
– In this period of recovery, gross job gains exceeded gross job losses in 6 of the 7 quarters. During the recovery, the deciding factor was the decline in the number of gross jobs lost. The increase in gross job gains was minimal.

Since 2000 the average number of gross jobs has steadily declined. The average number of gross jobs lost has been the determining factor in whether the net change was positive or negative. This lack of job creation, with new firms or existing companies, explains why the job recovery from both recessions has been so weak.

©Copyright 2011 by CBER.

Where are all the Startups? – Are they Really a Job Creation Machine?

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Suppose your investment advisor called you and said, “Have I got a deal for you? I will sell you 12,027 shares of a fund at $6.10 per share. The total cost to you is only $72,918. Sound good?”

Your advisor continues, “This is a killer fund. In 17 years, the price per share will rise from $6.10 to $18.30. And, in full disclosure I am required to tell you the fund will buy back a few shares along the way.  Sound good?

You reply, “Sounds great, but could you tell me more about the number of shares that will be bought back along the way?”

The advisor nervously answers, “Well, you see…the price per share increases from $6.10 to $18.10. Sound good?” Very quickly the advisor continues, “And the fund will only buy back 9,348 shares. You will still have about 22%-23% of your original shares. Sound good? Can you sign right here?”

You say, “Let me get out my calculator. That means the value of the fund is only $48,987 after 17 years. Sound good?”

The manner in which jobs are created by startups has a similar rate of return. (For purposes of this discussion, startups will be defined as companies less than one-year old that have employees. The Bureau of Labor Statistics (BLS) has tracked the performance of these companies since 1994.)

From the BLS data it is possible to look at the number of firms, average firm size, total employment, and survival rates for the firms formed in 1994. The BLS data shows:

Number of Firms
• In 1994 there were 12,027 firms.
• In 2011 there were 2,679 firms.
Average Firm Size
• In 1994 the average firm size was 6.1 employees.
• In 2011 the average firm size was 18.3 employees.
Total Employment
• In 1994 the firms had 72,918 employees.
• In 2011 the firms had 48,987 employees.
Survival Rate
• In 1994 the survival rate was 100%.
• In 2011 the survival rate was 22.3%.

Do the numbers look familiar? If not, revisit the opening paragraphs.

Startups are critical to future of our country for a variety of reasons; however, they may not be job creation machine that we have been led to believe. They add jobs in year one, but that base declines in year 2 and erodes further over time. Sound good?

With the decline in the number of startups and survival rates, this is a particularly frightening model for economic growth in the state!

For additional information on startups and job creation go to https://cber.co/ or the report “Where Are All the Startups?”

 

©Copyright 2011 by CBER.

Where are all the Startups? – Survival Rates on Downward Path

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The U.S. and Colorado have experienced volatile economic conditions for about 20 years. There was strong growth during the go-go 1990s, follow by two major recessions during the Lost Decade. Startups play an important role in any economy, but until recently there has been little data to understand their performance. This brief analysis uses BLS data and assumes that startups are less than one-year in age and have employees.

The following are the most frequent questions asked about survival rates for startups.
• Are the rates different based on the number of years the firms have been in existence?
• Are the rates different based on when the firm was started?
• How have the rates changed over time?
The answers are explained and can be observed below.

The first question is the easiest to answer – survival rates are lower for longer periods of time.
• The range for two-year rates was 60.9% to 68.9%.
• The range for five year rates was 43.7% to 50.7%.
• The range for eight-year rates was 33.4% to 39.7%.

A partial answer can be given to the second question. Data is available for different time frames (16 years for two-year rates, 13 years for five-year rates, and 10 years for eight-year rates). For the 10-year period that is common to all three rates, the lowest rates occurred in 2001.

The 2-year survival rate was 61.6% in 2001 and 60.9% in 2008. Based on the current trends, the lowest 5-year and 8 -year rates are likely to occur in 2008. This coincides with the low points in the business cycle.

The answer to the final question is simple – survival rates have declined over time.
• The 2-year rates began declining in 1999, posted a slight increase in 2002, declined in 2006 and rebounded in 2009.
• The 5-year rates showed a steady decline beginning in 1995. There was an uptick in 2002 and 2003, but the downward trend reappeared in 2004.
• The 8-year rates showed a downward trend beginning in 1995. There was slight upward movement in 2002 and 2003.
As mentioned above, these changes have coincided with the business cycle; however, over time they are trending downward.

Are there policy decisions that could reverse this downward path? Is this downward trend a function of the quality of teaching in colleges and universities? Are the multitude of higher education entrepreneurial centers that have been started over the past two decade having a positive impact? Is this trend a function of poor service from government programs such as the Small Business Development Centers or the Small Business Administration? Have the banks failed to properly fund the startups? Or would the survival rate have been worse if the university and federal government programs weren’t in place? Or is this downward trend simply a function of ten-years of annualized Real GDP growth of 1.6%.

Startups are an important part of the economy. When data becomes available for 2010 and beyond (several years from now), hopefully it will be possible to look back and see that the downward trend has reversed.

For additional information on startups and job creation go to https://cber.co/ or the report “Where Are All the Startups?”

 

©Copyright 2011 by CBER.

Where are all the Startups? – Jobs Created Have Increased at a Declining Rate Since 1999

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Startups, entrepreneurs, and small businesses have been the focal point of discussions about how the U.S. and Colorado will fully recover from the 2007 recession. As part of this dialogue, there is a wealth of information and misinformation about the importance of these businesses to the economy.

So what do the numbers say?

The first step in analyzing the growth of startups is to define them. The second step is to find a data set that tracks changes based on that definition.

There are many ways to define an entrepreneurial business venture or a startup company that include:
• No formal structure.
• Type – Sole proprietorships or LLCs.
• Funding – Microenterprises.
• Size – A company with 1-4 employees.
• Age – A company less than 1 year in age with employees.

For purposes of this discussion, startups will be defined as firms less than one-year in age that have employees. By definition, sole proprietorships, microenterprises, or LLCs may be included if they meet these criteria. The Bureau of Labor Statistics produces data about startups defined in this manner. BLS reports the number of firms and employees based on a year ending on March 31. For example, 1994 data includes startups for the period April 1993 through March 1994.

A review of the data shows the number of jobs created at startups has increased at a declining rate since 1999 for both Colorado and the U.S.

In 1999, 94,100 jobs were created at Colorado startups. That number decreased every year through 2010. That year the new group of startups created only 47,100 jobs. A slight increase was posted in 2011.

A similar pattern occurred at the national level. In 1999, 4,703,000 employees worked at U.S. companies started that year. By 2010, the number of employees working at companies that began operations that year had fallen to 2,457,000. A slight increase was recorded in 2011.

Colorado has a track record for having world renowned startups. Clearly good things have come from Colorado entrepreneurs and startup companies; however, by this definition, Colorado may not be the entrepreneurial Mecca that we are led to believe.

For additional information on startups and job creation go to https://cber.co/ or the report “Where Are All the Startups?”

©Copyright 2011 by CBER.