Today, Engine, along with the Charles Koch Institute and Startup Genome, issued a report looking at the overall health of the startup ecosystem. We hope this report can serve as a resource for policymakers considering a wide range of policy issues that impact early-stage companies across the country.
Overall, the report—”The State of the Startup Ecosystem”—finds that the U.S. startup ecosystem is thriving. From seed and angel rounds, to Series A, to venture capital as a whole, the number and value of startup fundings has grown over the past decade. The report also found a strong positive correlation between investment and acquisitions—paralleling the anecdote we often hear that investors use the profits from a successful exit to fund investment in new startups. Additionally, the report looks at trends in startup investments and exits outside of the country’s well-known innovation hotspots in order to provide a more accurate understanding of the distribution of startup funding across the entire U.S.
Despite the current health of the startup ecosystem, the report underscores the need for lawmakers to appreciate the budgetary constraints of the average U.S. startup when considering policy changes. Data show that the average seed-stage startup is working with about $55,000 per month. While at face value this may seem like a lot of money, the margin for unexpected costs is small, considering the typical costs of hiring and retaining employees, legal resources, product development, and more. For the vast majority of the startups that don’t raise capital through these funding mechanisms, the budget—and therefore the margin for unforeseen costs—is likely much lower.
Policymakers must consider the perspectives of entrepreneurs and work to craft pro-startup policies, and it is critical for them to also have an accurate understanding of the health of the startup ecosystem. Unfortunately, data painting a picture of the health of the startup ecosystem is incredibly difficult to access and analyze. Our report assesses U.S.-based technology and innovation companies founded after 1995 and examines changes and trends in startup investment and exits over the last decade. Data presented in the report were prepared and analyzed by Startup Genome, a world-leading independent firm.
The data utilized for this report may be the most comprehensive available, but there are still limitations. There is a lag endemic to early-stage funding data, so the data examined in this report stop in 2018, limiting the ability to situate the pandemic-related crisis in the broader trends. The report examines investment data, meaning investor-backed startups are captured well; however, startups that rely on other methods of funding are not. Investment data has recently begun to incorporate diversity and inclusion metrics, but these were not tracked historically. Other studies show that investor-backed companies skew white and male, and those findings should be considered in parallel as policymakers consider questions of equity. Taken together, these shortcomings highlight the need for better data about technology startups and a continuing conversation regarding their needs.
As policymakers continue to weigh the costs and consequences of potential policies in the technology sector, we hope this report will serve as a helpful and informative analysis and a jumping off point for conversations about how to evaluate and promote the health of the startup ecosystem.
You can read the full report here.
