• Chart of the Week
  • November 4, 2020

Assessing the quality of start-ups

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Economists in recent years have been trying to better measure how business startups drive growth.

But to understand the role young firms play in overall job creation, researchers realized that they can’t just look at the size and quantity of these entrepreneurial ventures—they also need to understand their quality.

In the American Economic Journal: Economic Policy, authors Jorge Guzman and Scott Stern measure both the quantity and quality of entrepreneurship in the US from 1988 to 2014.

The authors develop a way to measure quality that factors in characteristics of early-stage ventures, including their legal incorporation, organization, idea protection, and how those characteristics correlate to firm growth.

 

 

Figure 4 from Guzman and Stern (2020)

 

Figure 4 from their paper shows the geographic variation in entrepreneurial quantity and quality for the 32 states in their sample. The size of areas that are lighted up represents the number of firms and the color shows the quality. White is the lowest average quality and dark red is the highest. The most intense areas for startup potential are in well-known entrepreneurial hubs like Silicon Valley in California, Boston, and Austin, Texas. Also, several large cities like Los Angeles, Houston, Dallas, and Detroit not only have a large number of new registrants but also a high average level of entrepreneurial quality.

Not every place with a lot of activity yields high-quality startups. Florida, in particular, seems to have a high quantity but low average quality. The same is true of many Mountain States like Wyoming, Idaho, and Utah.

The findings offer a more nuanced way of thinking about entrepreneurial ecosystems and what characterizes the most successful job-creating regions.