Silicon Valley Entrepreneurship Success Data Lacking–And Other Surveys

Aug. 16, 2011
Entrepreneurship has been one of the most studied areas in the industry. But some information seems to be hard to come by, even in Silicon Valley--like measuring the business success of high-tech start-ups.

Entrepreneurship has been one of the most studied areas in the industry. But some information seems to be hard to come by, even in Silicon Valley--like measuring the business success of high-tech start-ups.

Ideally, business success would be gleaned from a dataset that follows new businesses or business owners over several years. But High-Technology Entrepreneurship in Silicon Valley, a study published recently by Bonn, Germany-based Institute for the Study of Labor (IZA), an independent nonprofit organization supported by Deutsche Post Foundation, and written by two American university professors, notes: “To our knowledge, no long-term panel datasets exist with large enough sample sizes to focus on Silicon Valley and information on owner characteristics.”

Most of the study focuses on business creation and the study’s two authors, Robert W. Fairlie of University of California-Santa Cruz and Aaron K. Chatterji of Duke University, note that “Business creation rates were 10% to 20% lower in Silicon Valley than the rest of the United States overall from January 1996 to February 2000”--the period where they focused most of their research. But most of this data was based on estimates of the area’s highly-educated workforce and other characteristics of the population.

They also believe that little has changed since then, even though technology represents 23% of the workforce in Silicon Valley, which is more than double the percentage for the rest of the United States. But reliable data is hard to come by.

According to the study, “Although research on entrepreneurship is growing rapidly, there are very few national datasets that provide information on recent trends in business formation. Although the data allow us to focus on high-tech industries, we cannot examine separate patterns for venture-capital-backed start-ups and employer firms, and cannot capture entrepreneurs moving to Silicon Valley with existing businesses or to immediately start businesses.” (According to U.S. Census Bureau data quoted in the study, many very successful young firms, especially in high-tech industries, are unincorporated and do not have employees.)

However, using matched data from 1996-2005 Current Population Surveys (CPS), which the research team defines as the percentage of the population of non-business owners that start a business each month, they were able to estimate the rate of entrepreneurship.

The study indicates that 390 per 100,000 high-tech workers started a business each month during the 1996-2000 period. The research also found that Silicon Valley had a higher rate of entrepreneurship in the six year period after the peak of NASDAQ on March 10, 2000 (and plummeted after that date) than during the economic boom of the late 1990s. The overall U.S. rate of start-ups also increased, but only slightly between 1996-2000 and March 2000 to December 2005, which the report defines as the post-boom period. “These findings are consistent with the common perception that the late 1990s were a period of unbridled entrepreneurship in Silicon Valley. The high returns to wage and salary work in Silicon Valley may have dampened the number of individuals creating new businesses.”

One data point they were able to establish: High-tech entrepreneurship is strongest in the San Jose/Sunnyvale/Santa Clara metropolitan statistical area (MSA), which accounts for 52% of the high-tech labor force, but only 32% of the total adult population of Silicon Valley.

The research for this study was also funded by the U.S. Small Business Administration, the Kauffman Foundation, the Networks, Electronic Commerce and Telecommunications Institute, and New York University.

Too Old To Start A Company?

Another study, this one by the Global Entrepreneurial Monitor, may be a surprise to those following young engineers and computer scientists (and college dropouts) who have been so successful starting new companies.

The survey indicates that people over the age of 35 made up 80% of the total entrepreneurship activity in 2009. That same year, the Kauffman Foundation conducted a survey of 549 startups operating in “high-growth” industries—aerospace, defense, computers and electronics, health care—and found that people over 55 are nearly twice as likely to launch startups in these industries.

The surveys suggest several reasons for this. One is that older entrepreneurs have more life and work experience. They also have a broader and deeper network of connections to call on for financial and other assistance. And they’re more likely to have acquired more wealth and a better credit history as they aged.

Why doesn’t this demographic group get as much attention as their younger entrepreneurial colleagues? One observation is that they’re likely to get involved in more complex technologies—more specifically, hardware developments, which get less attention than the more recent spate of hot Web apps that have proved to be successful for a growing number of younger entrepreneurs.

Who’s Funding Whom?

Something to consider if you’re ready to jump into the entrepreneurial pool: A survey by VentureSource, a News Corp. company, has found that investors seem to favor technology start-ups whose products or services target consumers rather than businesses.

In fact, the survey found that in the first three months of this year, venture-capital investment in consumer tech companies nearly tripled to $874 million from $310 million for the same period in 2010. At the same time, investments in tech companies with business products, while requiring a much larger financial outlay, rose at a much slower rate--to $2.3 billion from $1.9 billion a year earlier.

Still another study, this one by Babson College in Wellesley, MA, found “overwhelming evidence” that even a few elective courses in entrepreneurship can often put students on a path to starting their own business.

“We now have excellent empirical evidence that it makes a difference,” researchers at the school wrote in their study. “We think that entrepreneurship should be taught not only for the production and training of entrepreneurs, but also to help students decide if they have the right stuff to be entrepreneurs before they embark on careers for which they may be ill-suited.”

The study was conducted by Babson professors who analyzed the career paths of 3,755 Babson graduates from 1985 to 2009. One of their conclusions is that entrepreneurship should be taught to every business student. Another is: “There would be no business schools if there had never been any entrepreneurs.”

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