Published Online: February 25, 2014
Published in Print: February 26, 2014, as Grad Rates Seen as Fuel for Startups

Education Fuels Growth of Urban Entrepreneurs, Study Suggests

Startup and entrepreneurial growth in small to large cities is fueled more by high school diplomas and college degrees than by venture capital, government funding, or the presence of research universities, a study concludes.

The study, conducted by the Ewing Marion Kauffman Foundation, examined business activity in 356 U.S. metropolitan areas. Researchers found that investment levels of financial organizations, primarily venture capitalists, did not correlate with high startup activity, and that billions of dollars in federal government research expenditures and the presence of research universities were not associated with higher rates of entrepreneurship.

Instead, the authors say, education is the most significant factor correlated with entrepreneurial growth. "A substantial high school completion rate will further increase the area's startup rate," they write.

It was a finding that surprised Yasuyuki Motoyama, a senior scholar in research and policy at the Kauffman Foundation, a Kansas City, Mo.-based philanthropy that works to foster economic independence by advancing education and entrepreneurship. He is a co-author of the new study, "Beyond Metropolitan Startup Rates: Regional Factors Associated With Startup Growth."

Contrary to conventional understanding in the research literature, the study found that there are few significant factors that the public sector can affect to influence startup rates and growth in metropolitan areas. For the new report, released last month, a team of researchers examined the subject from three angles: the startup rate for all industries, for high-tech sectors, and for high-growth firms.

Among other findings, the research showed that metropolitan areas with more college graduates will produce more startups, and that greater high school completion rates will further fuel startup activity.

What Correlates to More Entrepreneurs in an Area

Education

A high ratio of college graduates, coupled with a substantial rate of high school completion

Size of Metro Area

Large areas tend to have higher entrepreneurial rates than smaller ones

But just because a city has a high college-completion rate does not necessarily mean that it has a high rate of high school completion, according to the study.

"Until I looked at the data, I assumed that if a city has a high level of college-completed adults, that city would also have a high level of high school-completed adults. But that is not true," said Mr. Motoyama, an expert in city and regional planning.

Expanding Skill Sets

Promoting high school completion would seem a logical outgrowth of the study. But states are "already all over high school completion," said Kathy Christie, the vice president of knowledge/information management and dissemination for the Denver-based Education Commission of the States. "That train's been out on the tracks for a long time."

What Doesn’t Promote Business Startups and Growth

Research

Billions of dollars in government research expenditures don't translate into more startups

Venture Capital

Investment levels of financial organizations, primarily from venture capitalists, do not correlate to high startup rates.

High-Tech Sectors

These only generate more high-tech startups

Rather, she said, the biggest "aha" from the study is the fact that college graduation is not the only significant educational factor generating startups.

In fact, the study cites older data from 2008 showing that 53 percent of entrepreneurs had actually not attained four-year college degrees."We're starting to hear from communities, 'Quit simply talking about four-year college completion, and recognize that there are lots of skills and credentials out there that make a difference for the earning power and long-term future for young people,' " Ms. Christie said.

Katherine Lucas McKay, a senior policy analyst for the Corporation for Enterprise Development, a Washington-based nonprofit that is dedicated to expanding economic opportunity for low-income families and communities in the United States, said the Kauffman study did not focus sufficiently on "microbusinesses," which are essentially self-employed individuals who have up to five employees. Inclusion of those businesses might have affected the results of the study, she said, by showing that a four-year college degree could be even less vital to entrepreneurial success.

"These are striving, successful 'Main Street' businesses that may not ever become Google, or even a firm that grows to 100 employees," she said, "but they add more than $1 trillion in economic activity every year."

Ms. McKay, who co-authored a January 2014 report called "Enhancing Support for Lower-Income Entrepreneurs Through Major Public Systems," said it's important for education policymakers to look at the skills that entrepreneurs want help with—such as how to forecast earnings—as part of the financial education taught in secondary schools. Learning those skills, she said, should be in addition to personal financial literacy, such as "how to create a budget" or "how to handle a bank account."

David T. Conley, the chief executive officer of the nonprofit Educational Policy Improvement Center in Eugene, Ore., and an education professor at the University of Oregon, based in the same city, added: "Why not have all students do a business plan? That would be kind of cool."

Pathways to Success

Mr. Conley also said the finding that students with a high school education contribute significantly to the startup economy doesn't surprise him.

"What does it take to be an entrepreneur? It takes perseverance, a willingness to take risks, some social skills to work with people." he said. "But does it take Algebra 2? Not necessarily."

The fact that roughly half of entrepreneurs do not hold four-year college degrees didn't faze Brian K. Fitzgerald, the CEO of the Business-Higher Education Forum, a membership organization of Fortune 500 chief executives and research university presidents that seeks to advance innovation in education and the workforce and bolster U.S. competitiveness.

"Look at Bill Gates. They had to give him an honorary degree. Steve Jobs dropped out of college, too," Mr. Fitzgerald said.

What's important, Mr. Fitzgerald said, is building talent pathways between colleges and employers in areas such as cybersecurity, risk analysis and management, and sustainability.

Related Blog

"We're working on seeding new high-school-to-college pathways that don't exist now," he said.

Not every student needs a college degree, he added. "We're saying every student should have a pathway to go as far as he or she sees fit," Mr. Fitzgerald said. "If they have the technical skills and knowhow with an associate's degree, then God love 'em. Go and be an entrepreneur."

But that may not be as easy as it sounds, because the vast majority of startups fail, according to experts.

Plus, the study points out that more research needs to be done to assess the correlation between educational attainment and entrepreneurial success.

Vol. 33, Issue 22, Pages 1,10

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