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External Debt Markets Key for Young Firms as They Age

Posted by: Mark Marich on May 13, 2010 Source: Policy Dialogue on Entrepreneurship

Data released on May 12, 2010 in the fifth follow-up report of the Kauffman Firm Survey (KFS), a study of new businesses tracked over their early years of existence, confirmed the important role of banks and other formal debt providers in young firms’ survival and growth.

The KFS baseline study started with a cohort of 4,928 firms that began operations in 2004. These companies are tracked annually to improve our understanding of how businesses are organized and operate in their early years, and to shed light on survival and growth indicators. The extensive survey covers a range of topics, including the founders' backgrounds, their sources and amounts of financing, firm strategies and innovations, and outcomes such as sales, profits and survival. The project has an additional three years of study planned. 

Findings from the most recently compiled data include:

  • 2,606 of the surveyed firms that survived 2008 injected an average of $78,000 into their businesses that year, with outside debt markets making up more than $52,000 – or almost 67 percent – of that total. By comparison, external debt markets provided 40 percent of financing in 2004, these companies’ first year of operation.
  • By 2008, the four-year survival rate of the firms that began operations in 2004 was 68 percent, with another 1 percent of the startups temporarily not operating. A small number, 4.8 percent, had either merged with or were sold to other businesses.
  • Surviving employer firms increased average employment from 4.6 employees in 2004 to 6.7 employees in 2008.
  • About 33 percent of firms had revenues greater than $100,000 by 2008, compared with just 21 percent in 2004.
  • While the high-technology sector comprises only 5.6 percent of the firms, these companies are more likely to have employees, higher sales and larger assets than non-tech firms do. They also have a significantly higher four-year survival rate of 91 percent, versus 61 percent for non-high-tech firms.
  • Almost 80 percent of the firms in the study were somewhat affected or affected a lot by the nation’s economic crisis.
The study, An Overview of the Kauffman Firm Survey: Results from the 2004–2008 Data and previous KFS report can be found at www.kauffman.org/kauffmanfirmsurvey. For the Kauffman Foundation’s press release, click here.
 

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