Austin’s startup density, 178 per 100,000 population, is 138% of the national rate, and ranks 5th among the 50 largest metros.
While Austin outperforms nearly all metro economies, it is not isolated from the long term downward trend in the business formation rate seen nationally over the last few decades.
One of 2015’s most important business climate rankings, the Kauffman Foundation’s new Startup Activity Index, named Austin first among the top 40 U.S. metros for entrepreneurial activity and startup density. The contributions that Kauffman Foundation researchers have made to developing rigorous measures of entrepreneurial ecosystem vitality are highly regarded. Many ratings and rankings seen in the media are produced with short term editorial considerations paramount over quality benchmarking of performance and progress. In contrast, the Kauffman Index is a “best places for” that offers an unparalleled application of available entrepreneurship measures.
The Kauffman Startup Activity Index employs two measures of when and how many people first start working for themselves, becoming entrepreneurs, plus a measure of startup density. The data for these measures come from two different Census Bureau surveys. The Current Population Survey yields data on the rate of new entrepreneurs and the share of entrepreneurs who are driven by opportunity (rather than necessity). The Business Dynamics Statistics (BDS) program produces data on new employer startup businesses. Since the publication of the Kauffman Index in June, new data for U.S. metros has been produced by the BDS program and that’s the data we’ll explore in this article.
New business formation in Austin climbed to 3,360 in 2013, exceeding 2012 by 1.4%. Nationally, 406,353 new firms formed in 2013, down by 1.2% from 2012. The number of new U.S. firms created annually has not regained pre-recession levels—2013 is 27.7% below the peak attained in 2006 (561,665). However, Austin’s number of new firms grew each of the last 4 years and both 2012 and 2013 exceed Austin’s previous peak of 3,297 in 2008. While Austin saw negative startup growth only in 2009 (down 14.0%), the number declined in four successive years nationally.
Austin ranks 23rd among 366 metropolitan areas for number of new businesses created in 2013, a position significantly higher than where the metro ranks based on the size of its population (35th) or its economy (33rd).
Austin was among only 23% of metros seeing an increase in business creation in 2010. Growth was much more widespread in 2011 with 66% of metros experiencing growth. However, in 2012 the number of metros experiencing growth fell back to 60% and in 2013, the rate is only 39%.
While new businesses formed in the Austin metro reached a new peak at 3,360 in 2013, current levels in Texas’ other major metros range from 6% to 17% below each’s pre-recession peak. Dallas-Fort Worth’s peak was 10,701 new businesses in 2005, compared to 9,344 in 2013 (-13%); Houston’s peak was 9,140 in 2007, compared to 8,547 in 2013 (-6%); and San Antonio peaked at 2,963 in 2006, compared to 2,446 in 2013 (-17%). Growth in 2013 was 0.6% in Houston, while Dallas-Fort Worth and San Antonio saw fewer new firms in 2013 (-1.2% and -3.3% respectively).
Although the number of business starts could be said to have recovered in Austin by 2012, on a per capita basis, new firms are not yet forming at the rate they were before the recession. Startups per 100,000 population is the startup density measure used in the Kauffman Index. Austin saw over 200 new businesses per 100,000 population each year from 1977 to 2008, except 1980. These 200-plus rates even applied following the 2001 “dot com” recession which hit Austin harder than much of the rest of the country. By 2012, the rate in Austin climbed up to 180 per 100,000 population after falling to 166 in 2010, but slipped by 1.6% to 178 in 2013.
At a rate of 178 new businesses per 100,000 population, Austin’s current rate of business formation is about 16% below the average (212) seen in Austin over the pre-recession decade (1998-2007). Nationally, 126 new businesses formed per 100,000 population in 2013, which is 28% lower than the annual average of 178 seen over the decade before the recession.
Over the pre-recession decade, rate of business formation in Austin averaged 110% of the national rate, but in 2013 Austin’s startup density is 138% of the national rate. The Raleigh, San Jose, and San Francisco metros, also traditionally recognized hotbeds of startup and venture capital activity, each have lower rates of business formation, 154, 162, and 163 per 100,000 population respectively in 2013, than Austin. Austin has the fifth greatest startup density among the 50 largest metros.
The BDS program has become an important tool providing insights about business formation and growth, labor market dynamics, and other features of the economy crucial to understanding current and historical U.S. entrepreneurial activity. The latest release of new data, is only the third time that the program has provided such data by metropolitan statistical area.
BDS is the gold standard of business creation data. It is based on the Census Bureau’s Longitudinal Business Database of the universe of employer companies (not a sample survey) and tracks economic activity at both the firm and establishment level over a long period of time. BDS tracks the annual number of new businesses (startups and new locations), and, by firm age and size, tracks creation and destruction of jobs at the establishment level, providing a picture of the dynamics underlying aggregate net growth in employment.
In the Austin metro in 2013, new establishments created 50,025 jobs and these new establishments included both startups (firms less than 1 year old) and new establishments of existing firms of varying ages. Expansions at existing establishments created another 69,712 jobs. Startups accounted for 17,863 or 36% of the 50,025 new establishment jobs. In 2012, startups accounted for 45% of new establishment jobs.
The share of employment in new and young firms is also a key startup density measure.
New and young firms account for a larger share of job creation than they do of employment and as the graph below illustrates, in Austin, they account for a greater share of job creation than they do in the nation as a whole.
The impact of the recession on new firms is seen in the reduced share of total employment that they account for after 2006 in Austin as well as nationally. In 2013, 3,360 startups accounted for 17,863 new jobs, representing 2.5% of the region’s 705,422 jobs. The share was 2.7% in 2012.
The two following graphs illustrate shares of employment and job creation by firm size and also disaggregate job creation by firm size for new and for expanding establishments.
Each perspective on business entry and job creation provided in the BDS dataset also applies to business exits and job destruction.
The graph below summarizes jobs created by new businesses and continuing businesses and jobs destroyed by businesses closing and continuing businesses laying off jobs in Austin.
In Austin in 2013, 119,737 jobs were created—50,025 by new businesses and 69,712 by continuing existing businesses. At the same time, 86,987 jobs were destroyed—31,999 by businesses closing and 54,988 as layoffs by continuing businesses. The net result is positive net job creation of 32,750 in 2013.
Vice President of Research, Beverly Kerr, joined the Chamber’s Economic Development Department in 2004, following 10 years in a similar role with the Kansas City Area Development Council. Beverly earned an M.A. in economics at the University of Missouri-Kansas City.