(B) Kauffmann Foundation Results
Recent data suggest an upward trend in the number of young firms, in addition to an increase in the number of small firms .
The Kauffmann Index, using data from the Current Population Survey, was used for the past decade as an important metric of entrepreneurship activity. The new Index focuses on new businesses or startups, and therefore on age of firms, not just size. The Start-Up Activity Index (SAI) rose in 2015 reversing a five-year downward trend beginning in 2010, when it stood at 0.13 declining to -0.04 in 2011, -0.72 in 2012, -0.70 in 2013, -1.06 in 2014, before climbing to -0.37 in 2015 .
Fig. 3.6 Number of US tech private deals
Fig. 3.7 Amount (USD) of US tech private funding
(C) US Census Data
A greater share of employment and a greater fraction of the total number of firms is attributable to mature firms (those that have been in existence for more than sixteen years), but a larger fraction of these mature firms is small in terms of number of employees. So granularity means small in employee size, although not necessarily young in age.
Aging of the US economy is thought to reduce entrepreneurial activity since fewer new firms are being created and young firms are more likely to fail. Examining long-term trends over the past two decades, Hathaway and Litan find that while there were more mature firms (over sixteen years in age) relative to young firms (one to five years in age) in the US, more of these mature firms were small in terms of having few employees . Importantly, mature, small firms demonstrated the largest growth, as “the growth in firm and employment shares by mature firms has been driven more by smaller firms” .
Dinlersoz, Hyatt and Janicki show that the average size (number of employees) of young firms (less than 6 years in existence) has been declining over the years 1983-2012, with the number of employees fluctuating in a band of 7.5 to 9 and the estimated trend showed a significant long-term decline .
However, large firms captured most of the labor market: they “represent the lion’s share of mature firm employment” . The Amazons and Walmarts accounted for less than 2 % of all mature firms in 2011, but as firms were consolidating and multi-establishment firms became more prevalent, their share of total employment was increasing overall .6
Business consolidation, where large firms account for a significant majority of workers, is different from business network formation. The latter is consistent with the theory of granularity since the nodes of business remain small while there is increasing connectivity across all these nodes. The startup culture can be viewed as a sprouting of small nodes of business, which quickly acquire links to other nodes, some becoming larger hubs. These links provide valuable information about changing consumer preferences, production costs and technology. Business consolidation occurs through acquisitions of younger, smaller firms by larger, mature firms. These acquisitions are often torn apart so as to extract the synergistic parts of the target firms. For example, the engineers are retained, while the CEO becomes a serial entrepreneur.7