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 to 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 2012, Virginia business startups as a percentage of existing establishments rose for the second year in a row. The startup rate varied regionally, but most regions continued to improve through 2012. Establishment churn, which measures the rate of businesses creation and destruction, mirrored the business startup pattern. There was one venture-backed IPO in Virginia during 2014, as had been the case in each of the last two 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 — decreased by eight in 2015, but the state continued to lead the nation for this indicator on a per capita basis.
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?
Following a precipitous fall in the number of business startups during the recession, Virginia has seen gradual gains with the economic recovery. However, startup rates have not yet recovered to pre-recession levels. The number of establishment births as a percentage of existing establishments in Virginia was 10.3% in 2008, dropping to 9.3% in 2010. The startup rate recovered to 10.8% by 2012. This bow-shaped pattern was evident elsewhere in the U.S. as well. Virginia’s startup rate in 2012 was lower than the U.S. average at 11.3% and ranked 22nd among U.S. states. The leading state in business startup activity was Nevada at 14.4%. Virginia’s rate was lower than three benchmark states: California (12.5%), Texas (12.5%), and North Carolina (11.2%).
There is wide variation in business startup activity within Virginia, and most regions have begun to recover from the effects of the recent recession. The Northern region had the highest business startup rate among Virginia regions at 12.3%.
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 21.2% in 2008 to 19.7% in 2010, as both establishment births increased and death rates increased as a result of the recession. Churn increased in 2011 to 20.0% and again to 20.6% in 2012 as the recovery took hold. Nationally, Virginia’s 2012 churn rate ranked 21st highest among U.S. states and was near the national rate of 21.2%.
Within Virginia, the Northern region had the highest churn rate at 22.8% in 2012, followed by the Hampton Roads region at 20.9% and the Central region at 20.3%.
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 2010 and 2011. In 2012-2014, 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.
Over the period 2011 to 2014, Virginia IPOs’ post-offer value as a percentage of state GDP was 0.16%, ranking it 11th among the states. This percentage was below the national average of 0.39% and lagged three benchmark states including California (2.12%), Massachusetts (0.97%), and Maryland (0.36%).
Fast Growing Firms
The presence and growth of dynamic firms is a key measure of business dynamism. Inc. Magazine’s 2015 list of 5000 privately-held fast growing companies included 276 Virginia firms, down from a peak of 302 in 2011 and from 284 in 2014. As was the case in 2014, among U.S. states, Virginia had the highest number of fast growing firms on a population-adjusted basis for 2015. 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. 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 startup and establishment churn measures improved statewide in 2012, the most recent year available, although the state lagged behind the national average. The value of Virginia venture-backed IPOs grew over the previous year but the number of fast growing firms declined. 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 improving in tandem with the economic recovery and contributing to state employment growth. However, wide disparities among Virginia regions exist, with some regions yet to shake off the effects of the recent recession.
Data Sources and Definitions:
Each IEMS indicator reports data available as of June 27, 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, 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.
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 PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: 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/. 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.
Urban and rural areas are classified using the 2010 census urban and rural classification criteria. Urban areas are identified as either Urbanized Areas (UAs) consisting of at least 50,000 or more people or Urban Clusters (UCs) consisting of at least 2,500 and less than 50,000 people. “Rural” areas consist of all other areas. https://www.census.gov/geo/reference/ua/urban-rural-2010.html.