Goal: Enhance Virginia’s business climate for entrepreneurs and high-growth technology enterprises.
Business dynamics examines business rejuvenation, growth, and connectivity, taking into account multiple stages of the business life cycle. Indicators measure business startup activity, the rate of business creation and destruction, the number of firms graduating from privately held venture capital incubation, initial public offerings (IPOs), and the number of fast growing firms. Broadband access indicates the state’s capacity to facilitate connections through businesses and residents accessing and sharing knowledge online.
In 2014, Virginia business startups as a percentage of existing establishments increased . Establishment churn, which measures the rate of businesses creation and destruction, remained the same. There was one venture-backed IPO in Virginia during 2015, as had been the case in each of the last three years, with the post-offer value improving significantly over the period. The number of fast growing firms – defined as a firm listed on the Inc. 5000 list of fast growing firms – increased by fifty-two in 2016.
Why are business dynamics important?
Business dynamics indicators provide a gauge of the entrepreneurship and innovation climate. An increase in business startup activity provides evidence that residents are willing to take on more risk. Establishment churn shows that less innovative or efficient firms are going out of business and being replaced by more innovative and efficient firms. Fast growing firms are among the most successful entrepreneurial endeavors and have a large impact on job creation. Venture-backed IPOs allow early-stage investors to recoup their investments and recycle the funds into other investments. Finally, broadband access enables residents and businesses to better trade, communicate, collaborate, and share knowledge, raising productivity and improving the quality of life.
How has Virginia performed over the last five years?
Virginia has seen a modest gain in the number of business startups during the economic recovery. The number of establishment births as a percentage of existing establishments in Virginia was 9.0% in 2010 and had risen to 9.5% by 2014. This improvement was evident elsewhere in the U.S. as well. Virginia’s startup rate in 2014 was lower than the U.S. average at 10.0% and ranked 21st among U.S. states. The leading state in business startup activity was Nevada at 13.1%. Virginia’s rate was lower than two benchmark states: California (11.4%) and Texas (10.9%).
Establishment churn represents the degree of resource fluidity that allows labor and capital to be allocated from older industries and firms that use outdated technologies to newer innovative and modern firms and industries. This process is also known as “creative destruction”, a term coined by 19th century economist Joseph Schumpeter to describe how growing, dynamic economies develop. Establishment churn measures the rate of firm entry and firm exit relative to the total number of businesses in the state (i.e., establishment birth rate plus establishment death rate). A higher churn rate indicates more competitive conditions and signals a more dynamic environment for innovation and entrepreneurship that fosters economic growth.
Virginia establishment churn dropped from 18.4% in 2010 to 17.7% in 2014;, establishment births increased slightly while death rates decreased more as the economic recovery continued. However, the business churn stayed constant from 2013 from 2014. Nationally, Virginia’s 2014 churn rate ranked 23rd highest among U.S. states and was below the national rate of 18.6%.
An Initial Public Offering (IPO) occurs when the stock of a private company is sold for the first time to the public. This sale allows venture capitalists and firm entrepreneurs to recoup their investments and make the funds available for other investment opportunities. IPO exit activity is related to the overall condition of the economy and the buoyancy of the financial markets. Nationally, venture-backed IPOs declined significantly during the 2007-2009 recession and have been gradually recovering since that time. Virginia had no venture-backed IPOs in 2011. In 2012-2015, there was one venture-backed IPO each year with the values growing from $368.4 million in 2012 to $829.7 million in 2013 to $919.1 million in 2014, and $1,168.7 million in 2015.
Over the period 2011 to 2015, Virginia IPOs’ post-offer value as a percentage of state GDP was 0.18%, ranking it 9th among the states. This percentage was below the national average of 0.35% and lagged three benchmark states including California (1.85%), Massachusetts (0.69%), and Maryland (0.32%).
Fast Growing Firms
The presence and growth of dynamic firms is a key measure of business dynamism. Inc. Magazine’s 2016 list of 5000 privately-held fast growing companies included 328 Virginia firms, up substantially from 284 in 2014. Among U.S. states, Virginia had the highest number of fast growing firms on a population-adjusted basis for 2015 (the latest year for which population data is available). Virginia had 32.9 firms per one million residents compared to less than half that amount (15.4) for the U.S. Among benchmark states, Massachusetts was the closest, with 23.7 fast growing firms per million residents.
Broadband availability measures the speed and transmission capabilities of the state’s telecommunications infrastructure. As more data, knowledge, and market activity migrate online, it is vitally important for businesses and residents to have access to the best available capabilities and tools for accessing and sharing information for education, commerce, healthcare, and an array of other sectors.
As of May 2016, 90.8% of Virginia residents had broadband coverage defined as a 25 megabits per second (Mbps) or higher download speed. This compared to 82.7% of Virginia residents with a similar speed in 2015 and 64.6% in 2012. In January 2015, the Federal Communications Commission (FCC) updated its broadband benchmark to 25 Mbps for downloads and 3 Mbps for uploads, as the prior standard was considered dated.
Choice of providers has also improved over time for the 25 Mbps download standard. In 2016, 9.2% of residents had the choice of three or more providers, 47.0% had a choice of two, and 34.6% had just one provider. These compare to 5.2%, 38.8%, and 38.6% respectively the year before, and 0.7%, 30.1%, and 30.8% respectively in 2012.
Significant disparities persist between Virginia’s urban and rural areas in broadband access: 99% of Virginia’s 5.4 million urban residents had broadband coverage in 2016, compared to 87% of Virginia’s 2.6 million rural residents.
What are the implications?
Business dynamics indicators help to gauge the entrepreneurship and innovation climate, taking into account multiple stages of the business life cycle. These indicators either improved or remained fairly steady for every measure in the most recent year. Business startups improved statewide in 2014, the most recent year available, but the state lagged behind the national average. Business churn remained the same. The value of Virginia venture-backed IPOs grew over the previous year and the number of fast growing firms increased markedly. Virginia remains the state leader for fast growing firms but is behind the national and benchmark state averages for venture-backed IPO valuations. Virginia’s innovation and entrepreneurship climate is generally improving in as the economic recovery continues.
Data Sources and Definitions:
Each IEMS indicator reports data available as of September 29, 2016 and provides a description of trends for five years of historical data when available.
Business Startups: Establishment Births as Percentage of Establishments, U.S. Census Bureau, Business Dynamics Statistics (BDS) for states http://www.census.gov/ces/dataproducts/bds/
Data available in September.
Establishment Churn Rate: Calculated as establishment births plus establishment deaths divided by total number of establishments. U.S. Census Bureau, Statistics of U.S. Businesses: http://www.census.gov/csd/susb/susbdyn.htm. State figures available in January with two-year lag; County figures available in December with three-year lag.
Venture-Backed IPOs: Data on number and value of initial public offerings backed by venture capital obtained from Thomson Reuters. Nominal Gross Domestic Product by State from the Bureau of Economic Analysis: http://www.bea.gov/regional/index.htm. Available in June.
Fast Growing Firms: Inc. 5000 Fastest Growing Private Companies, Inc. Magazine: http://www.inc.com/inc5000/list/2015/. Released in September. Population, U.S. Census Bureau. Population Estimates (legacy estimates): https://www.census.gov/popest/index.html. Released in December.
Broadband Access: Data from the Center for Innovative Technology (CIT) and Virginia Information Technologies Agency (VITA) based on National Broadband Map. For a map of current coverage, see: http://gismaps.vita.virginia.gov/broadband/. Datasets for each year were taken from the spring submissions. Percentages of coverage are based on the total population in the study area (Census Blocks that are less than two square miles). Information in broadband map is based on provider claims.