Goal: Enhance Virginia’s business climate for entrepreneurs and high-growth technology enterprises.
Business dynamics indicators assess the level of entrepreneurial activity, connectivity, and business growth and decline in the state. Within the IEMS, Business Dynamics is unique in looking at multiple stages in the life of Virginia businesses. Initial startups and fast growing firms are compared side-by-side with the rate of business births and deaths and the number of firms moving to the next level with funds from initial public offerings (IPOs) and via mergers and acquisitions (M&As). Additional measures of entrepreneurial activity and broadband access indicate the adaptability of the economy and the opportunity for businesses and residents to access and share knowledge online.
In 2012, the number of startups per 10,000 population rose over the previous year, suggesting that the climate to start a new company improved. The number of fast growing firms — defined as firms with annual employment growth exceeding 20% for five straight years — also increased in 2012. Establishment churn, which measures the rate of businesses opening and closing their doors, eased in 2010, the most recent year of data available, as the rate of establishment deaths declined. Venture-backed IPO activity in Virginia remained modest with one IPO in 2012, following four years without any venture-backed IPOs in the state. Entrepreneurial activity — the number of firms with ten or fewer employees beginning operations — rose modestly in 2012, as did broadband coverage.
Why are business dynamics important?
Business dynamics indicators help to gauge the level of entrepreneurship and innovation in businesses within the state at various stages in their cycle of growth. When entrepreneurs start new businesses, jobs are created and the state’s economy benefits. Fast growing firms are also an important source of job creation. Establishment churn is the result of inefficient companies closing and being replaced by innovative new companies. Venture backed IPOs and M&As offer early-stage investors an opportunity to recoup their investment, and provide growing companies with access to capital to expand further. Entrepreneurial activity is an indicator of the strength and flexibility of the state’s economy. Finally, broadband access is crucial to the state’s businesses and residents, allowing them to share knowledge and collaborate.
How has Virginia performed over the last five years?
Over the past five years, the number of startups per 10,000 population in Virginia declined from 33.6 in 2008 to 29.7 in 2012, though the past four years have shown slow recovery from the initial shock of the recession. The only decline over this period was between 2008 and 2009. As the recession significantly weakened the business climate, the number of startups per 10,000 population dropped to 26.7. In 2010, startups per 10,000 climbed to 29.2 before further increasing to 29.6 in 2011. The number of startups per 10,000 population inched up to 29.7 in 2012.
Fast Growing Firms
Fast growing firms, which tend to be innovators offering a product or service with recognized commercial value, are defined as firms with annual employment growth exceeding 20% every year for five consecutive years. By definition,these firms are job creators and therefore crucial to the state’s economy. In 2008, 8,120 firms in Virginia had annual employment growth exceed 20% for five consecutive years. In 2009, as the recession ended, the number of fast growing firms fell to 7,440. There were 7,876 fast growing firms in Virginia in 2010, followed by 7,169 and 7,396 in 2011 and 2012, respectively.
In a market that rewards innovation, new and more efficient companies ultimately replace outdated firms that are unwilling or unable to modernize. Establishment churn measures how fast businesses open and close relative to the total number of businesses in the state (i.e., establishment birth rate + establishment death rate). A higher percentage indicates increased competition and a better environment for innovation. Virginia establishment churn rose from 22.6% of firms in the state either opening or closing in 2006 to 24.0% in 2007 as both the establishment birth and death rates climbed. As the recession took hold, establishment churn in Virginia declined to 21.2% in 2008, driven lower by a drop in the establishment birth rate. It then declined further to 20.8% in 2009, again as the birth rate slipped due to the difficulty of starting a business during a recession. Establishment churn continued to ease to 19.7% in 2010 as the establishment death rate declined. Nationally, establishment churn stood at 20.4%.
Venture capitalists ultimately seek to recoup their investments. This is achieved when shares of a company they have invested in are sold to the public in an IPO or when these companies are acquired through an M&A. IPOs have the additional benefit of offering these innovative companies additional capital to use for expansion, while M&As are an indication that the products and services offered by the venture-backed companies are viewed by strategic buyers as being valuable. Overall investor confidence is a driver of venture-backed IPO exit activity; nationally, venture-backed IPOs declined significantly in 2008 and 2009 due to the financial crisis. In Virginia in 2007 there were two venture-backed IPOs raising $941.6 million; there were no venture-backed IPOs in Virginia from 2008 through 2011. In 2012, one venture-backed IPO raised $368.4 million. Data on acquisitions of Virginia-based venture-backed companies were not available.
Entrepreneurial firms are defined as firms with ten or fewer employees. The level of entrepreneurial activity in a region is an indicator of the strength and flexibility of the economy, as small businesses tend to be leaders in innovation and are able to react quickly to changes in demand. In 2008, 34,970 entrepreneurial firms began operations in Virginia. In 2009, the number of entrepreneurial firms beginning operations in Virginia fell to 24,310, rising to 24,986 in 2010. The number of new entrepreneurial firms in Virginia continued growing in 2011 and 2012 with 26,490 and 26,550 new entrepreneurial firms, respectively. In additional positive news in 2012, the number of entrepreneurial firms expanding exceeded the number of entrepreneurial firms contracting for the first time since 2005.
Availability of broadband is an indicator of the state’s innovation climate. As more data and knowledge is stored online and available to download in ever-larger files, broadband access is increasingly important for innovators and entrepreneurs to access and share knowledge as well as collaborate virtually. In 2012, 96% of Virginia residents had broadband coverage, with 52% of those with coverage having at least three options of broadband providers. In 2013, 97% of Virginia residents had broadband coverage, while 52% of those with broadband coverage had three or more options.
What are the implications?
Business dynamics indicators help to gauge the level of innovation and entrepreneurial activity in the state at the level of firms in various stages of growth or decline. Every indicator measured through 2012 grew over the previous year. Establishment churn data are only available through 2010, but show Virginia’s economy recovering from the recession with fewer firms closing and on par with the national average churn. The improvement in Virginia’s innovation and entrepreneurship climate is helping the state to recover from the Great Recession by fueling job growth.
Data Sources and Definitions:
Each IEMS indicator reflects the latest available data and includes a discussion of trends in up to five years of historical data, depending on availability.
Startups per 10,000 Population: United States Census Population Estimates and Bureau of Labor Statistics Business Employment Dynamics Data by States, Table 9. Private sector establishment births and deaths, seasonally adjusted at http://www.bls.gov/bdm/bdmstate.htm.
Fast Growing Firms: Defined as firms with annual employment growth exceeding 20% every year for five consecutive years. Data from Virginia Employment Commission.
Establishment Churn: Calculated as establishment birth rate plus establishment death rate. Data from Small Business Administration, Statistics of U.S. Businesses; State, MSA & County dynamic data at http://www.sba.gov/advocacy/849/12162.
IPOs, M&As: Data on initial public offerings backed by venture capital obtained from PWC MoneyTree and the Center for Innovative Technology (CIT). Mergers & Acquisitions data were not acquired.
Entrepreneurial Activity: Chmura Economics & Analytics JobsEQ®, derived from the Bureau of Labor Statistics, Quarterly Census of Employment and Wages.
Broadband Access: Data from the Center for Innovative Technology (CIT). For a map of current coverage, see http://gismaps.vita.virginia.gov/broadband/.
CIT acknowledges the important contribution of Chmura Economics & Analytics in preparing the IEMS.