Austin entrepreneurs grow their startups faster than all but one large metro area in the country, according to a new report that provides some new evidence for why the region creates so many new firms but has a harder time sustaining them.
According to the Kauffman Foundation’s 2016 Growth Entrepreneurship Index — the last of three reports on separate aspects of business creation and expansion — only Washington D.C. entrepreneurs grew their firms faster than Austin’s startup community.
The study underscores the robust entrepreneurial environment in Central Texas, which ranked No. 1 in Kauffman’s 2015 Startup Activity Index released about a year ago.
However, it also prompts questions about Austin’s poor showing among small businesses that are in existance for at least five years. The region ranked just 28th out of 40 on Kauffman’s 2015 Main Street Index released in December.
“We often talk about entrepreneurship as if it’s one thing, but starting a business is different from running a business, which is different from growing a business,” said Arnobio Morelix, a senior research analyst at the foundation.
Morelix said it’s hard to tell from the study data precisely why Austin ranks so highly in startups and growth, but doesn't do as well on established Main Street small businesses. However, the reports and other studies provide some hints.
For example, while a relatively small share of startup companies grow to employ more than 50 employees in their first 10 years of existence, Austin had an unusually high rate of such “scale-ups,” the report found. That suggests Central Texas sees a higher percentage of companies expand beyond the 50-employee small business threshold Kauffman used in its Main Street report.
All told, the new report said, about 2.25 percent of new companies in the region grew beyond the 50-worker threshold, more than double the national rate. (San Antonio was in a virtual tie for the highest share of scale-ups, at 2.67 percent.)
“This share of scale-ups for Austin is pretty atypical,” Morelix said. “It looks small, but most companies start and don’t grow or start and go out of business. For the nation, 45 to 50 percent of companies don’t make it to year five.”
Austin also posted a high rate of growth across all its startups, regardless of head count, expanding their payrolls by an average of 81.2 percent over their first five years — the fifth-highest rate in the country. And as a share of all businesses, only Washington, D.C., posted a higher percentage of high-growth companies, the report found.
Another explanation of what might be happening to local startups came in Austin’s absence from a supplemental section of the report.
While not a factor in the index itself, Kauffman researchers included a list of top metro areas for initial public offerings. Almost all the metro areas that scored highest on the startup and growth indexes — including major tech hubs but also cities like Nashville and Charlotte — ranked among the Top 10 in IPO activity. Austin did not.
While the combined reports did not indicate exactly what was happening, Morelix said, “There are not a lot of those companies going public, even though they’re growing on the employment and revenue indicators.”
In fact, a recent study led by Murray Rice of the University of North Texas confirmed what has long been conventional wisdom about Austin’s high-growth startup environment — that such firms are more likely to be acquired than in many metro areas.
According to Rice’s analysis of Inc. 500 businesses, Austin had very few companies discontinue their operations. In fact, the region had the lowest concentration of shuttered Inc. 500 companies in the country, the study found.
But the metro area also posted the second-highest level of acquisition activity, behind only Boston, according to the analysis. So while many of these companies might still have operations here, they’re no longer Central Texas companies per se.
Austin’s greater tendency toward acquisitions stems in part from the type of entrepreneurs and funding sources here, said Barbary Brunner, CEO of the Austin Technology Council.
On one hand, many of the region’s most talented leaders are serial entrepreneurs and enjoy starting something, building it to a point and finding the next idea, Brunner said. On the other, she said, the region has a lot of seed and early stage funding sources but not as much mid- to late-stage capital.
“We have traditionally been a smaller chunk of funding town,” she said, “and when you have a market where you don’t have a lot of mid- to late-stage capital, when a company is big enough to consider that sort of thing they’ll also consider acquisitions.”
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