How are Kansas startups performing?

How should the entrepreneurial success of any city or state be measured? In my own past research, I, like some others, have simply counted the number of young firms being formed, perhaps dividing them by all firms to produce a startup rate or ratio.

The idea behind this measure is that having more new firms is likely to produce more high-growth firms, much like more shots on goal in hockey produces more goals.

Why focus on young high-growth firms? Because research shows that these companies are typically the engines for regionwide growth, and also tend to pay the best.

So why not count the numbers and progress of high-growth firms directly? That’s the approach taken in a study by the Kauffman Foundation released in early June.

The Kauffman study provides several measures of high-growth firms, broken down by state into two equally sized groups, the larger and smaller states. Kansas is in the latter grouping. (I wish I could report Wichita data but the study only includes such data for the nation’s 40 most populous metros, and unfortunately we don’t make the cut.)

First, the good news. Kansas ranks seventh among the smaller states (though down from sixth last year, and behind Oklahoma’s fifth-place ranking) in an overall index of startup growth.

Second, the mixed news. There has been a downward trend for almost three decades in the share of all firms that grew employees from zero to at least 50 over a 10-year period. That share was once 2 percent, but had fallen steadily to 1.6 percent in 2011. It has now inched up only to nearly 1.7 percent.

There is also no discernible change in the trend in annual employment growth of all companies 5 years old: a 53 percent increase over the past year. This was higher than last year, but not nearly as high as in some previous years, such as more than 60 percent in 2008 and more than 100 percent in the early 1990s.

Third, the worrisome news. The Kauffman survey reports that the number of firms with at least $2 million in revenue whose sales have grown at least 20 percent per year for three years running increased from 2009 to 2013, but has declined for two straight years since.

These data shed only limited light on the controversial change in Kansas tax law that exempted a wide range of businesses from state income taxes. That law is only 4 years old, so it’s too early to know its full impact on high-growth companies. But we’ll clearly need more of them if Kansas’ economic future is to be bright.

This story was originally published June 17, 2016 at 12:04 AM with the headline "How are Kansas startups performing?."