The Ewing Marion Kauffman Foundation in the US is one of the world’s top organisations for research and development into the SME sector. Although care has to be taken in translating their work (largely research based in the US) to the UK, I always find their publications to be worth a read.
They have just published a report following a longitudinal study of some 5000 small firms that were founded in 2004, tracking their development through the early years. I think that the report should provide useful insights for policy makers here in the UK and national and local levels as well as for anyone in the game of small business development supporting entrepreneurs.
Here are some soundbites from the report – and the questions that they provoke for me:
- Nearly 60 percent of the businesses had no employees in their first year. Just under three-quarters of businesses had one employee or less, while about one-quarter of businesses had two or more employees. Very few businesses (less than 4 percent) had more than 10 employees.
- How do the stats on our start-up work compare with this? Is number of employees in year 1 linked in to entrepreneurial success? Does a ‘slow’ start lead to a ‘slow’ future?
- More than a third of businesses (37 percent) had no revenue in their first year of operation. About 45 percent of businesses experienced a profit during their first year, while about 55 percent of businesses that experienced a loss. About 17 percent of businesses had profits in excess of $100,000.
- How realistic are our entrepreneurs forecasts on profit and turnover?
- How good a job do we do in helping them to develop realistic forecasts?
- What can we do to help entrepreneurs recognise that profit may only accrue after a long period of working at the business?
- How realistic are our entrepreneurs forecasts on profit and turnover?
- Nearly 44 percent of new businesses had no debt financing during their first year of operation. Many businesses were started with very little debt financing: 17 percent of businesses started with $5,000 or less; nearly 11 percent started with $100,000 or more.
- What percentage of businesses that we support are adequately financed at the outset? How can we help entrepreneurs to consider their financial structures and approach re-structuring as an opportunity if necessary?
- About 80 percent of businesses had some positive equity investment in their business in the first year. Nearly 10 percent invested $100,000 of equity into their business, while another 33 percent invested between $10,001 and $100,000. About one-quarter of businesses invested some amount less than $5,000.
- How does equity finance work in poorer communities?
- What alternatives to equity finance exist?
- How does equity finance work in poorer communities?
- The vast majority of equity invested came from the business owners themselves. Just 10 percent of the businesses used external equity sources in their first year. Parents were the most common source of external equity (3.4 percent), while spouses provided equity to 1.6 percent of businesses. Non-family informal investors and venture capitalists were used very infrequently (2.7 percent and 0.6 percent, respectively).
- Nearly 70 percent of businesses in the Kauffman data were owned by men and just over 30 percent were owned by women. Whites owned more than 81 percent of the businesses, while blacks owned 9 percent, Asians owned 4 percent, and the remaining 5 percent were owned by individuals of other racial groups. About 6.6 percent of the businesses were owned by Hispanics.
- How effective are we at engaging the full spectrum of race, gender, sexuality and faith in feeding their enterprising soul?
- Just under 9 percent of firms closed in calendar year 2005, and the survival rates vary by owner demographics. For example, 88 percent of black-owned businesses survived, compared with 92 percent of white-owned businesses and 91 percent of Asian-owned businesses. Women-owned businesses had a survival rate of 89 percent, about three percentage points lower than businesses owned by men.
- What are we doing to track survival rates and understand patterns in them that may point to problems in the quality or accessibility of our services?
- Starting a business is (relatively) easy. Starting a successful business that provides a vehicle for personal and professional development and allows us to develop as happy human beings is a whole different ball game. How are we tracking the ‘happiness’ of the entrepreneurs we work with?
- Are business survival, jobs created and profitability the only important metrics? or should we looking at other aspects of the entrepreneurs satisfaction and well-being?
- If we succeed in increasing business birth rates, should we also accept an inevitable increase in business failure rates?
- Do we understand the full cost of business failure – economic, emotional, mental etc?
Each year the Kauffman Foundation produces an excellent ‘Thoughtbook’ that summarises it research findings and showcases some of the excellent work that the Foundation funds to support a wide range of entrepreneurs. You can request a copy here.
Which websites and organisations do you use to access information and support?