An Overview of the Kauffman Firm Survey 2004–2008

Alicia Robb
E.J. Reedy
Janice Ballou
David DesRoches
Frank Potter
Zhanyun Zhao

Executive Summary

Although entrepreneurial activity is an important part of a capitalist economy, data about U.S. businesses in their early years of operation have been extremely limited. Only recently has it become apparent what important contributions new and young businesses make to job creation and innovation activities. As part of an effort to understand the dynamics of new businesses in the United States, the Ewing Marion Kauffman Foundation (the Foundation) sponsored the Kauffman Firm Survey (KFS), a panel study of new businesses founded in 2004 that have been tracked annually and will continue to be tracked through 2011. Tracking businesses over time allows us to follow business evolutions that would not be apparent in cross-sectional snapshots, the more typical collection method. The KFS dataset provides researchers with a unique opportunity to study a panel of new businesses from startup to sustainability (or exit), with longitudinal data centering on topics such as how businesses are financed; the products, services, and innovations these businesses possess and develop in their early years of existence; and the characteristics of those who own and operate them.

Results. The current data provide an understanding of how businesses are organized and operate in their first five years of existence (2004 through 2008) and provide some indicators of survival and growth. Other measures describe the characteristics of the panel, such as the extent to which these businesses are involved in innovative activities. A series of tables gives a broad overview of the business and owner characteristics and firm survival over the period, and provide some new information available in the Third Follow-up Survey.

Highlights include:

• Like all firms, young businesses are seeing major impacts on their business operations from the economic crisis.
• The most challenging problem faced by young businesses in 2008 was slow or lost sales. The second-most-challenging problem was the unpredictability of business conditions.
• Nearly 80 percent of respondents said they were somewhat affected or affected a lot by the recent economic crisis.
• External debt markets became even more important for young firms in 2008.
• In the first year of operation, external debt markets provided the single largest source of financing. The new firms injected about $80,000 on average into their new ventures during the first year of operation. Outsider debt (bank loans, credit cards, credit lines, etc.) made up more than $32,000 of that total and was the single largest funding source.
• Four years later, in 2008, surviving firms injected another $78,000 into their businesses with the amount of financial capital raised from outside credit markets increasing to $52,000. Thus, the importance of external debt markets on average continues to rise as firms survive and grow in their early years.
• Of those firms that applied for new bank credit or a renewal of a line of credit in 2008, nearly one-third had their applications sometimes or always denied. The most common reasons for denial were insufficient collateral and poor personal credit history. In addition, a similar number of respondents as last year indicated that they didn’t apply for funding at some point when they needed credit because they feared their applications would be denied (18 percent).
• By 2008, about 27 percent of firms that started in 2004 had permanently closed, 5 percent were sold or merged, and another 1 percent temporarily were not operating. The overall survival rate for the 2004 startups was 67.6 percent by the end of 2008, compared to 73.4 percent for year-end 2007.
• Firms surviving through 2008 were much more likely than firms that exited over the period to have primary owners older than age 45. Previous industry experience and startup experience had less impact on firm survival prospects than owner age did.
• While about 40 percent of firms had employees in 2004, by 2008 about 55.6 percent of surviving firms had employees. Surviving firms with employees, which are now four years old, increased average employment from 4.6 employees in 2004 to 6.7 employees in 2008. Thus, surviving firms were growing over this period.
• By 2008, about 53 percent of firms had revenues greater than $25,000, compared with just 31 percent in 2004, and about 21 percent of firms had more than $100,000 in assets in 2004, compared with 33.2 percent of surviving firms in 2008.
• Half of firms made investments in intangible assets in 2008, compared with just 14 percent of firms investing in research and development (R&D). Intangible asset spending averaged $28,000 in 2008, while average R&D spending was more than $54,000. High-tech firms are much more likely to have patents, copyrights, or trademarks. R&D investment and investment in intangible assets also were much higher for high-tech firms than for non-tech firms in 2008.
• While the high-tech sector comprises only 5.6 percent of the firms, these firms are more likely to have employees and are larger in terms of sales and assets than non-tech firms are. They have a significantly higher four-year survival rate of 91 percent, versus 61 percent for non-high-tech firms.

Further analysis is available in papers that are posted to the KFS section of the Ewing Marion Kauffman Foundation Web site as they are completed (http://preprod.kauffman.org/kfs/).

Data Availability. The Kauffman Firm Survey is a research dataset accessible to scholars around the globe. The public-use microdata file for the Kauffman Firm Survey, which contains data from the Baseline, First, Second, Third, and Fourth Follow-up Surveys, is available at http://preprod.kauffman.org/kfs/. The dataset can be downloaded in SAS, STATA, or SPSS. Researchers wishing to access a more detailed data file and to engage with a community of researchers in analysis of the KFS should consider applying for access to the University of Chicago NORC Data Enclave. The NORC Data Enclave provides secure remote access to the KFS confidential microdata file, which contains more detail regarding industry codes, geographical codes (zip code, metropolitan statistical area, and state), firm credit scores, and many additional continuous variables (in addition to categorical variables). The KFS confidential microdata may only be accessed through the NORC Data Enclave. Details on applying can be found on the KFS Web site: http://preprod.kauffman.org/kfs.

KFS Design. The study created the panel by using a random sample from the Dun & Bradstreet (D&B) database list of new businesses started in 2004. In response to the Foundation’s interest in understanding the dynamics of high-technology businesses, the KFS oversampled these businesses based on the intensity of research and development employment in the businesses’ primary industries.

Mathematica Policy Research, Inc., conducted extensive questionnaire design activities to establish consistent definitions of what constituted a new business and the start of business operations, and to investigate the most efficient methods for collecting these data. The KFS sought to create a panel that included new businesses created by a person or team of people, purchases of existing businesses by a new ownership team, and purchases of franchises. To this end, the KFS excluded D&B records for businesses that were wholly owned subsidiaries of existing businesses, businesses inherited from someone else, and not-for-profit organizations. Also, previous research on new businesses has reported variability in how business founders perceive when their businesses started operations. Therefore, a series of questions was asked about indicators of business activity and whether these were conducted for the first time in the reference year (2004). These indicators included:

• Payment of state unemployment (UI) taxes
• Payment of Federal Insurance Contributions Act (FICA) taxes
• Presence of a legal status for the business
• Use of an Employer Identification Number (EIN)
• Use of Schedule C to report business income on a personal tax return

To be “eligible” for the KFS, at least one of these activities had to have been performed in 2004 and none performed in a prior year.

The questionnaire covered a variety of topics, including business characteristics, strategy and innovation, business structure and benefits, financing, and demographics of the principals.

Data Collection Methodology. The Baseline Survey was conducted between July 2005 and July 2006. Interviews were completed with principals of 4,928 businesses that started operations in 2004, which translates to a 43 percent response rate when the sampling weights are applied. A self-administered Web survey and Computer-Assisted Telephone Interviewing (CATI) were used for the data collection, and KFS respondents were paid $50 to complete the interview. CATI completes accounted for 3,781 (77 percent) and Web completes accounted for 1,147 (23 percent) of the total interviews. The results across sampling strata show that 2,034 interviews were completed in the two high-technology strata (See Appendix A for more information about the sampling strata), and the remaining 2,894 interviews were completed among non-high-tech businesses.

The sample for the First Follow-Up Survey consisted of the 4,928 businesses that completed the Baseline Survey. The First Follow-Up was conducted between June 2006 and January 2007, and 3,998 interviews were completed, which translates to an 89 percent response rate after adjusting for the sample weights. During the First Follow-Up, a significantly larger percentage of interviews were completed through the Web survey (2,366 or 59 percent) than in the Baseline, with CATI completes accounting for 41 percent (1,632 interviews).

Data collection on the Second Follow-Up Survey closely mirrored that of the First Follow-Up. Data collection began on May 31, 2007, and concluded on December 1, 2007. Overall, the study continued to be successful in retaining panel businesses, achieving a response rate of 84 percent (weighted). There was a slight increase in the percentage of respondents who completed the Web survey (63 percent in the Second Follow-Up compared to 59 percent in the First Follow-Up). Because the Second Follow-Up Survey was the third annual survey in which KFS panel members were asked to participate, KFS respondents usually remembered the previous surveys and required little persuasion. Nonetheless, there were some refusals, which necessitated a refusal conversion effort. Of the 4,523 cases in the Second Follow-Up, 404 initially refused, of which 66, or 16 percent, were converted and completed the questionnaire.

The data collection for the Third Follow-Up began on June 24, 2008, and concluded on December 23, 2008. About two-thirds of the 2,915 respondents chose to answer the survey by Web, while about one-third answered by CATI. A 78 percent response rate (unweighted) was achieved. Several new questions were added on sources of comparative advantage, credit applications and loan turndowns, predominant market for the firm’s products and/or services, international sales, and Internet sales.

The Fourth Follow-Up occurred in 2009 about 2008 business activities. Seventy-one percent of the 2,606 respondents chose to answer the survey by Web. An 82 percent response rate (unweighted) was achieved. Several new questions about the business owner, such as marriage status, net worth, and perceptions of change, were added, as were questions on current topics such as the national financial crisis and loan guarantees. Additional details of the study design are available in the introduction as well as the appendices.