There’s something counter-intuitive about Wisconsin dropping to dead last among the 50 states in the latest business startup index published by the Ewing Marion Kauffman Foundation.
Really? The Badger State has fewer entrepreneurs than Mississippi, West Virginia or Alabama, just to mention three states that often top America’s economic 911 call list?
Incredulous or otherwise, Wisconsin has never fared well in Kauffman’s annual Index of Startup Activity, which began in 1997. This year’s fall to last place was not a high-board dive: Wisconsin was 45th the year before. In the recently released 2015 report, Wisconsin trailed Alabama, Pennsylvania, Minnesota and West Virginia among the bottom-feeders.
Come to think of it, how did Minnesota make Kauffman’s Hall of Shame? In most side-by-side comparisons, Wisconsin often looks like a poor step-brother to our historically vibrant neighbors to the west.
It all goes to illustrate a simple point about economic rankings. State-by-state rankings of economic activity depend on what’s measured and how.
The Kauffman index ranks states in three categories: rate of new entrepreneurs, opportunity share of new entrepreneurs and startup density. The first category is a measure of business ownership, the second is an indicator of entrepreneurs starting a business because they spotted market opportunities and the third is roughly a per capita measurement.
Other surveys look at slightly different categories. The University of Nebraska’s Bureau of Business Research studies five components in its annual report: Net growth in business establishments, per capita growth in business establishments, business formation rate, number of patents per 1,000 people and the average income of non-farm proprietors. The Nebraska economists say their rankings reflect key elements of an entrepreneurial climate: business startups and failures compared to population, innovation and income.
So how does Wisconsin fare in the Nebraska index? It was 33rd among the 50 states in August 2014, the last time it was published. That’s not bragging-rights material, but neither is it dead last.
Here’s a metric that matters: According to the Milken Institute’s State Science and Tech Index, Wisconsin has risen steadily in the net formation of high-tech businesses per 10,000 businesses. Wisconsin ranked 38th in its 2010 report, 24th in 2012 and 18th in 2014. It was also sixth in the number of high-tech businesses growing faster than the U.S. average. Both measures are important because tech businesses are statistically likely to create well-paid jobs.
Regardless of rankings, there’s no denying Wisconsin faces startup hurdles.
Demographics don’t work in the state’s favor. The state’s population skews slightly older and it attracts fewer immigrants, who are much more likely to start a business than native-born Americans. Mom-and-Pop businesses, often in service or retail, account for the bulk of all startups nationally, even if they are not high-growth businesses that create a lot of jobs.
Wisconsin’s relatively low unemployment rate also works against more people starting a business. If you already have a job, you’re less likely to risk striking out on your own.
Some industries, such as construction, have high rates of entrepreneurship during boom times. Wisconsin sees fewer construction startups for several reasons, which is why the Wisconsin Legislature is debating lifting the “prevailing wage” requirement for local construction projects. The national entrepreneurship rate in construction is 12 times the startup rate in manufacturing.
Speaking of manufacturing, the national startup rate for that sector is low. Wisconsin is still a manufacturing-heavy state, with about 16 percent of its private workforce engaged in manufacturing versus 9 percent nationally. Because manufacturing requires high capitalization, startups aren’t as common.
There are some regulatory and tax hurdles, as well. Wisconsin treats startup companies pretty much the same as major firms in some critical areas, such as taxes on “paid-in capital.” Certain types of young, pre-revenue companies in Wisconsin pay a state tax on venture capital raised – a sore point for investors and unique among the states.
And while the rate of business creation in Wisconsin is lower than in other states, the survival rate appears to be higher. Maybe that’s a credit to Midwestern work ethics combined with a culture of fiscal conservatism, but it’s also a tribute to a support structure that wasn’t in place 10 years ago.
For Wisconsin to truly become a startup state, policymakers must confront the overall development strategy. Is Wisconsin more intent on raiding Illinois for business relocations or growing its own? So long as it’s the former and not the latter, expect to stay near the bottom in most startup rankings.