It has long been thought that the number of entrepreneurial ventures in a society is what matters. This makes sense. The more small businesses that are formed in one place, the more jobs become available, and the more money is generated in said place. However, Jorge Guzman and Scott Stern, both of MIT, have found in a recent study that quantity may not be as important as quality. Their paper takes an in-depth look at the startup field in America, and makes a few predictions about its future.
What Guzman and Stern do in this paper is describe ways to determine if startup companies are going to grow. Startups are known for bringing jobs to wherever they are based, but some types of companies have to hire more than others. If a small mom-and-pop shop opens in a city, for example, it will most likely only need a few employees. However, if an innovative company with the potential for a large amount of future growth is begun, it adds a lot more value to a community. These are the ones that help the economy the most.
The researchers refer to a company’s potential for growth as the ‘quality’ of the company, and link it to predictions about the future growth of a particular area. They mapped out the quality of different startup companies, and how quality linked to each company’s gross domestic product (GDP) growth. They found a significant correlation between quality and GDP growth in larger quality companies, but no significant correlation in smaller quality companies.
Of course, everyone who has ever taken a statistics class knows that correlation does not equate to causation. The GDP growth of specific companies could be directly related to the area in which the companies are growing, for example. However, this is an interesting concept for further study.
In order to predict the quality of a company, Guzman and Stern formed an algorithm. It tells them if a company with either go public or be bought for a large sum. This algorithm does not churn out highly specific results from company to company, but it gives a broad understanding of if a company will expand in the future or not.
While this paper leaves much to be desired from a research standpoint, it is also sends a powerful message to America’s entrepreneurial community as a whole. It disproves the idea that entrepreneurial ventures in this country are on the decline. It also challenges the idea that America’s economic growth is slow going. The amount of quality startups is increasing, which means that economic growth must be increasing as well.
Overall, this paper brings America’s entrepreneurial potential into the light. I am intrigued to see what the startup community will do with this information.