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Heartland startups may be growing faster than their Silicon Valley counterparts

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Startups in Silicon Valley, New York, and Boston may get the lion’s share of funding — but that isn’t slowing down startups in the Heartland.

Today, the Kauffman Foundation released its annual Growth Entrepreneurship Index, which tracks the year-to-year growth of firms that employ at least one person besides the owner. The Index found that the five metro areas that were experiencing the largest rates of growth entrepreneurship are: Washington, D.C; Austin, Texas; Columbus, Ohio; Nashville, Tennessee; and Atlanta.

“Even though they are not huge ecosystems (and don’t have lots of unicorns, for instance), they have a high number of growth companies as measured by both revenue and employment growth,” Arnobio Morelix, a consulting data analyst for the Kauffman Foundation, told VentureBeat in an email.  “For example, their companies are gaining traction in their first five years in terms of employment growth, businesses are reaching multi-million dollar revenues and high growth….at higher rates than what we see in most other ecosystems in the U.S.”

The Kauffman Foundation report measures Growth Entrepreneurship at the national, state, and metropolitan level in three different categories: rate of startup growth, share of scaleups, and high-growth company density.

Rate of startup growth measures the percent change in average employment that a group of startups experience during their first five years of operation. Share of scaleups refers to the number of startups that become large or medium sized businesses (meaning they have 50 or more employees) by their tenth year in business. Lastly, high-growth company density refers to the concentration of fast-growing private companies — “companies that have at least $2 million in revenue and 20 percent annualized growth over a three-year period” — using data from the Inc. magazine’s annual list of the 5,000 fastest-growing private companies in the U.S.

Even though smaller hubs like D.C. and Austin topped the list, San Jose and San Francisco aren’t far behind, and secured the 6th and 7th spots on the Growth Entrepreneurship Index respectively. Interestingly, San Jose had the highest rate of startup growth — meaning its startups were most likely to see the highest percent increases in employment from the year they were founded to year five. However, San Jose had a relatively low high-growth company density of 94.4 — meaning that out of every 100,000 employer firms, 94.4 qualify as “high-growth.” Meanwhile, the metro with the highest levels of growth entrepreneurship, D.C., which has a high-growth company density of 306.8.

This means that San Jose startups aren’t experiencing as large of percent increases in year-over-year revenue growth as startups in other metro areas. However, the data should be taken with a grain of salt, given that privately-owned companies in the U.S. are not required to publicly disclose their revenue, and the Inc. 5000 list only includes startups who apply to be on the list and allow Inc. to publish their revenue. (Disclaimer: I used to work for Inc.) 

One other piece of good news: the national rate of startup growth is above pre-recession levels for the first time. The Kauffman Foundation notes in its report, however, that “entrepreneurial growth in the United States — especially as measured by the number of companies reaching medium size or larger in terms of employment—is largely down from the levels experienced in the 1980s and 1990s.”

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