Getting behind Wisconsin’s business startup figures: Which companies matter most?

With a fresh crop of winners in the Governor’s Business Plan Contest, some enthusiastic out-of-state investors, and more than 500 people buzzing about the latest trends, you would never have guessed from last week’s Wisconsin Entrepreneurs’ Conference that the state lags in company startups.

The anecdotal evidence of Wisconsin’s progress as a place to start a company, especially high-growth companies, is persuasive:

• Forbes contributor Joel Kotkin recently ranked Madison as one of the nation’s five fastest-growing cities when it comes to “information” jobs, which include broad categories such as software, computer system design, Internet services, and data science.
• Outside investors at the Entrepreneurs’ Conference talked about the rise of the Midwest and Wisconsin as a place to put money into emerging companies. “We believe there will be more technology companies built in the Midwest in the next 10 years than there have been here in the past 50,” said Chris Olsen, who left Silicon Valley to help start Drive Capital in Columbus, Ohio. Drive has already invested in two Wisconsin startups. New York-based Great Oaks Capital, represented at the event by John Philosophos, has invested in 15 Wisconsin companies so far.
• Emerging clusters in Wisconsin include educational software, health information technologies, medical imaging, medical devices, water technologies, and innovation around human resources, especially in the Milwaukee area.

So why does Wisconsin still trail in most 50-state comparisons of business startups? There are a number of possible explanations.

Demographics in general don’t work in Wisconsin’s favor in terms of business startups. The state’s population skews slightly older and 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 — even if they are not high-growth businesses that create a lot of jobs.

Wisconsin’s relatively low unemployment rates also work against more people here starting a business. If you already have a job, you’re statistically less likely to quit and create your own.

Some industries, such as construction, have high rates of entrepreneurship during boom times. Wisconsin sees fewer construction startups for several reasons, not the least of which is the “prevailing wage” requirement that sometimes comes into play. The national entrepreneurship rate in construction is 12 times the startup rate in manufacturing.

And speaking of manufacturing, the national startup rate for that sector is low. Wisconsin is still a manufacturing-dominated state, with about 16% of its private workforce engaged in manufacturing versus 9% nationally. Those are excellent jobs and companies for the most part — but the sector simply doesn’t spawn a lot of startups.

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There are some regulatory and tax hurdles, as well. Wisconsin treats startup companies pretty much the same as major firms when it comes to unemployment compensation, workers’ compensation, and even taxes on paid-in capital for companies that are incorporated in another state but located here.

Finally, while the rate of business creation in Wisconsin is lower than in most states, the survival rate appears to be higher. Maybe that’s a credit to the Midwestern work ethic combined with stubbornness, but it’s more likely that a support structure exists today that wasn’t in place a decade or so ago.

Building on Wisconsin’s company startup rate is likely to be a source of debate during the fall election campaign. Attendees at the Entrepreneurs’ Conference got a taste of that when Gov. Scott Walker addressed the crowd Wednesday, and Democrat Mary Burke paid an impromptu visit later in the day.

The focus should remain on high-growth startups, the so-called “gazelles” that are the most likely to create large numbers of jobs. Within that focus, Wisconsin already has a head start in sectors that fit within national and even global market trends.

All startups may be created equal, at least in terms of the number of initial employees, but some grow a lot faster than others. That’s where the policy debate should concentrate — and could have the most effect.

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