Business Dynamics

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 2015, Virginia business startups as a percentage of existing establishments was steady. Establishment churn, which measures the rate of businesses creation and destruction, increased slightly. There was one venture-backed IPO in Virginia during 2017, compared to none the year before. The number of fast growing firms – defined as a firm listed on the Inc. 5000 list of fast growing firms – decreased by thirty-eight in 2017, although Virginia remained a leader on a population-adjusted 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?
Startups
Virginia has seen a little change in the number of business startups over the last five years. The number of establishment births as a percentage of existing establishments in Virginia was 9.5% in 2011 and, despite slight ups and downs in 2012 and 2013, had returned to 9.5% in 2014 and 2015. The U.S. as a whole experienced a slight increase in the startup rate over the 2011-2015 period. Virginia’s startup rate in 2015 was lower than the U.S. average at 10.1% and ranked 23rd among U.S. states. The leading state in business startup activity was Nevada at 12.8%. Virginia’s rate was lower than three benchmark states: California (11.4%), Texas (10.8%), and North Carolina (9.7%).

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Establishment Churn
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 18.6% in 2011 to 18.0% in 2015; establishment birth rates were constant while death rates decreased more as the economic recovery continued. However, the business churn increased slightly from 2014 from 2015. Nationally, Virginia’s 2015 churn rate ranked 21st highest among U.S. states and was below the national rate of 18.9%.

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IPOs
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 have been gradually recovering since the recession. Virginia had one venture-backed IPO each year from 2013 to 2015 and none in 2016. In 2017, there was one venture-backed IPO worth $715.5 million. Over the period 2013 to 2017, these IPO values averaged $727 million per year with a low of zero in 2016 and high of $1,168.7 million in 2015.

Over the period 2013 to 2017, Virginia IPOs’ post-offer value as a percentage of state gross domestic product (GDP) was 0.19%, ranking it 11th among the states. This percentage was below the national average of 0.22% and lagged three benchmark states, California (0.93%), Massachusetts (0.85%), and Maryland (0.12%).

VentureBackedIPOS

Fast Growing Firms
The presence and growth of dynamic firms is a key measure of business dynamism. Inc. Magazine’s 2017 list of 5000 privately-held fast growing companies included 290 Virginia firms, down from 328 in 2016 but near the average for the period 2012 to 2015. Among U.S. states, Virginia had the second highest number of fast growing firms on a population-adjusted basis for 2017. Virginia had 34.2 firms per one million residents compared to less than half that amount (15.4) for the U.S. Utah was first with 35.8 fast growing firms per one million residents. Among benchmark states, Massachusetts was the closest, with 21.3 fast growing firms per million residents.

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Broadband Access
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.

Based on FCC Form 477 data, 91.0% of Virginia residents had broadband coverage, near the beginning of 2017. Broadband is defined as a 25 megabits per second (Mbps) or higher download speed. This coverage compared to 90.1% of Virginia residents with a similar speed in 2016. 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 slightly for the 25 Mbps download standard. In 2017, 1.3% of residents had the choice of three or more providers, 49.546% had a choice of two, and 40.3% had just one provider. These compare to 1.1%, 49.2%, and 39.8% respectively in 2016.

Significant disparities persist between Virginia’s urban and rural areas in broadband access: 98.8% of Virginia’s 6.3 million urban residents had broadband coverage in 2017, compared to 85.6% of Virginia’s 1.7 million rural residents.

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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 were constant statewide in 2015, the most recent data available, though the state lagged behind the national average. Business churn increased slightly. The value of Virginia venture-backed IPOs grew over the previous year and the number of fast growing firms declined slightly. 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 expansion continues.

Data Sources and Definitions:
Each IEMS indicator reports data available as of June 22, 2018 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,  Business Dynamics Statistics (BDS) for states http://www.census.gov/ces/dataproducts/bds/. Data available in September.


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:  Data obtained from Inc. 5000 Fastest Growing Private Companies, Inc. Magazine: http://www.inc.com/inc5000/list/2017/. 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 obtained from the Center for Innovative Technology (CIT) and Virginia Information Technologies Agency (VITA) based on Federal Communications Commission (FCC) data. 2016 coverage is based on June 2016 data release.  2017 is based on December 2016 release (June 2017 data was not available at the time of this report). For a map of current coverage, see: https://broadband.cgit.vt.edu/IntegratedToolbox/.  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.