Strong Startup Ecosystems Drive Economic Growth

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Does a Strong Startup Ecosystem Matter?

Using the Startup Intensity, for a given city an estimate of its growth ranking relative to other cities can be calculated.  The primary purpose of this model is to quantify the importance of a strong or weak startup ecosystem for a given city’s growth based on two readily available factors: (1) median age of the City’s population and (2) the Innovation intensity calculated real time from www.Indeed.com.

City Growth Ranking Model

In October 2018, experts from WalletHub[1] determined the 515 most rapidly growing local economies based on two key dimensions, “Sociodemographics” and “Jobs & Economy” using 15 relevant metrics spanning from 2011 to 2017. Sociodemographics metrics included population growth, working-age population growth, and college-educated population growth.  Jobs & Economy metrics included job growth, increase in ratio of full-time to part-time jobs, median household income growth, increase in number of startups, and eight other factors.  Each city’s weighted average across all metrics was used to calculate its overall score which was used to rank-order the 515 cities.

Importance of Startups on Growth

Research[2] has shown that a vibrant startup ecosystem is an essential ingredient in creating strong growth.  In that research, Startup Genome reported that:

  • “Startups are the key vehicle by which regions and their citizens can take advantage of technological change, and startups depend on strong ecosystems.”

  • “Those places that fail to boldly and immediately invest in startup ecosystems, and thus fail to produce startups, will experience economic stagnation.”

These finding are reinforced by TechNet’s paper[3]How the Startup Economy is Spreading Across the Country — and How It Can Be Accelerated, where it wrote “Recent research from academic economists suggests that regions that produce more high-quality startups show better economic performance. The report cites that a doubling of entrepreneurial quality in a region predicted an increase of 6.8% in GDP 11 years in the future.”

Startup Intensity can be Measured Real Time

Michael Mandel[4] of the Progressive Policy Institute showed it is possible to estimate the local startup ecosystem by determining the number of jobs with the word “startup” are advertised in a locale by www.Indeed.Com and dividing it by the total number of jobs to obtain an innovation intensity.  An Innovation Index is published by the blog www. Panhandle Progress.com[5] where the United States as a whole is the baseline of one.  The relative startup friendliness is compared to the United States by dividing the local startup intensity by the startup intensity of the United States.

Methodology

From census data[6], the median population age for each of the 515 cities WalletHub assessed was determined.  Using www.Indeed.com web site the number of jobs with the word “startup” in the job posting and the total number of jobs posted for October 2018 were derived and a Startup Intensity (Startup Jobs Posted/Total Jobs Posted) calculated for each city.  The WalletHub Socioeconomic, Economy and Jobs, Total Score, and Rank data was matched with the relevant Age and Startup Intensity factors for each city.

[Author’s note:  The calculations in this blog are single variable means.  There are more sophisticated means of calculations but this simple approach illustrates the point and provides rough, fast, indicative results.]

Impact of Age on Startup Ecosystem

Research[7] by Azouley has shown that the age of entrepreneurs has a direct correlation on startup activity with peak startup activity around the age of 40.  See Figure 1 taken from that report.

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Correlations of city median population age with its startup intensity is consistent with Azouley’s research.  The mean median population age of the 515 cities is 35.2 and the mean startup intensity is 2.02%.  The youngest 10 cities, are all university cities, average an age of 25 and startup intensity of 1.22%.  The oldest 10 cities, tending to have a large population of retirees, average an age of 47.3 and a startup intensity of 1.27%.

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Relationships Derived

Correlations were derived by curve fitting the mean value against either age or Intensity for the following:

  • Figure 6: Total Score vs Startup Intensity: Equation (where x=Intensity and y= Score):  y = 1137x + 11.856; R² = 0.6595

  • Figure 7: Startup Intensity vs Median Population Age: Equation (where x=Age and y= Intensity): y = 0.0047x – 0.1372; R² = 0.3394

  • Figure 8: Mean Socialdemographics Rank vs Mean Startup Intensity: Equation (where x= Intensity and y= Rank): y = -10931x + 549.03; R² = 0.4891

  • Figure 8: Mean Jobs & Economy Score vs Mean Startup Intensity: Equation (where x= Intensity and y= Score): y = 1140e-54.74x; R² = 0.6777

  • Figure 9: Mean Total Score vs Mean Median Population Age: Equation (where x= Intensity and y= Score): y = 1137x + 11.856; R² = 0.6595

Score & Rank Equations

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Example Results

Pensacola with a median population age of 39.3 in Oct 2018 had an Intensity of 0.77% putting it at an equivalent growth rank of 519.  By January 2019 the Intensity value had fallen to 0.4% dropping Pensacola to an equivalent growth rank to 611, underscoring the importance of a strong startup ecosystem and the weakness of Pensacola’s ecosystem.  The mean Startup Intensity for cities of the same median age is 1.65% compared to Pensacola’s 0.4%.  A 1.65% intensity would place Pensacola at a growth position of 416 putting it in the top 500 growth cities in the United States.

Figure 3 Example Results

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Figures

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[1] https://wallethub.com/edu/fastest-growing-cities/7010

[2] https://startupgenome.com/reports/2018/GSER-2018-v1.1.pdf

[3] http://technet.org/blog/how-the-startup-economy-is-spreading-across-the-country

[4] https://www.progressivepolicy.org/issues/economy/how-the-startup-economy-is-spreading-across-the-country/

[5] http://www.panhandleprogress.com/innovation-index/

[6] https://factfinder.census.gov/faces/nav/jsf/pages/community_facts.xhtml?src=bkmk

[7] Age and High-Growth Entrepreneurship* Pierre Azoulay, MIT, et. al. March 23, 2018

 The author can be contacted through his web site www.EnviromationInc.com or through his blog www.PanhandleProgress.com.