Dear Pittsburgh: What do we do about our 2015 Kauffman Ranking?

A few weeks ago, the 2015 Kauffman Index on Startup Activity [full PDF report here] released a report ranking Pittsburgh last of the nation’s 40 largest metropolitan areas. While the study included all forms of entrepreneurship (and not just tech and innovation), the announcement from such an influential publication has left the Pittsburgh entrepreneurial community asking two things:

  • Why are we ranked so poorly?
  • What can we do to improve our ranking?

To help the city’s entrepreneurs and the many organizations that support them understand our 40th place ranking, FortyX80 will be hosting members of the Kauffman Foundation Research and Policy team to discuss not only the ranking, but a broader perspective on Pittsburgh’s entrepreneurial landscape. While seating is limited for the August 3rd event, we will be live tweeting on our Twitter account and offering other opportunities for remote engagement. Stay tuned to our blog and social media channels for updates.

(Update: The event is officially waitlist-only but you can follow along and participate digitally using the hashtag #KauffmanPGH.)

However, before the event, we wanted to dive further into our disappointing ranking and get a better understanding of both the methodology behind the study and the reality of Pittsburgh’s entrepreneur scene from a tech perspective. Most of us don’t believe we should be in last place – but we can’t be foolish enough to delude ourselves into thinking that there’s no truth to it.

So what does this ranking really mean and how do we move forward?

What the current Index measures

First, it’s important to understand what exactly the Kauffman Index is and what metrics the rankings are based on.

The Kauffman Index has been a frequently referenced annual report on entrepreneurship for the past ten years. As VP of Research and Policy Dane Stanger noted in his Foreword in this year’s Index, “measurement matters, and further improvements in entrepreneurship data will continue to shape public policy, private decision-making, and other areas.”

For the first time, the 2015 Index focused on three characteristics which had not been measured in previous reports. They included not only the tech industry, but also all new business formation in their measurements.

  • Rate of New Entrepreneurs: the percentage of adults becoming entrepreneurs in a given month 

    • Includes entrepreneurs with incorporated or unincorporated businesses, with or without employees

  • Opportunity Share of New Entrepreneurs: the percentage of new entrepreneurs starting businesses because they saw market opportunities, not out of necessity

    • Calculated by the number of entrepreneurs who started new business while currently employed, as opposed to unemployed

  • Startup Density: the number of startup firms by total population

    • Startup firms defined as employer firms less than one year old employing at least one person besides the owner

Why Pittsburgh is ranked last (And Some Key Numbers)

While we’re not looking to make excuses for Pittsburgh’s ranking, there are a few aspects of the methodology that do not particularly work in the city’s favor. (The following statistics are from Accelerating Growth: Investing in Pittsburgh's Technology Sector, Trends and Highlights 2010-2014 by Innovation Works and Ernst & Young; and Pittsburgh Technology Council’s 2014 State of the Industry Report.)

  • All industries, from restaurants to software companies, were included in their measurements. Pittsburgh’s startup growth measures are focused around tech and innovation. Evidence includes:

    • Increased investment in Pittsburgh technology companies in 2014– $437.8 million in 177 deals, a 46% increase in dollars and 19.6% increase in deals over 2013

    • The University of Pittsburgh ranked 5th among US universities in terms of National Institutes of Health funding in 2014

    • Universities saw a 33% increase in the number of patents issued and a 3.4 % increase in the number of licenses from 2013 to 2014

    • Information technology, environmental technology, advanced manufacturing and energy technology have seen double-digit advances in either total annual payroll, average wages, or both

    • The $20.7 billion annual payroll of technology and related companies represents more than 34% of the region’s total wages, the highest ever measured

    • CMU has spun off 300 companies in the last 15 years; Pitt, 104 companies since 1996

Funding for Pittsburgh Companies from Venture Capital Firms
  • The Index is primarily focused on outcomes, not inputs, with Pittsburgh having several indicators of success in the latter category in 2014– in the same 40 metropolitan areas included in the 2015 Kauffman Index, Pittsburgh ranks 11th in investment dollar per capita and 5th in deals per million residents.

    • Venture capital firms invested $332.9 million in 39 deals, a 168% increase in dollars and 26% increase in deals over the previous year

    • VCs invested the most in our region since 2001 (an anomaly year at the height of the dotcom era)

    • 11 venture capital firms made their first investments in the region

    • Local angel investors invested $72.9 million, a 35% increase over 2013

While those numbers are promising, it doesn’t change the fact that Pittsburgh was still ranked last. The most important take away remains: there’s vast room for improvement throughout the region. In conversations and follow up articles, Pittsburgh-area entrepreneurs expressed particular frustration with lack of access to local capital (despite the above statistics), sub-par citywide infrastructure, and outdated investment priorities and approaches.

Tech is pivotal to our region’s success but, in and of itself, it won’t be its savior. The dissatisfaction felt by local entrepreneurs points to the need for the community to embrace a culture of risk taking, business friendliness, and building a sense of place which embraces opportunity.

What we can do about it

While we definitely take the Kauffman Index seriously, we aren’t overly panicked for Pittsburgh. The community is engaged, active, and progressing forward, as seen through the increase in the number of investment dollars, local venture capitalists and angel investors, incubators, accelerators, co-working spaces, tech center real estate investments, and flourishing university innovation programs. Yet while these advancements are encouraging on the surface, there is significant room for improvement when it comes to the fundamentals of building a successful business.

Pittsburgh primarily falls short in the following categories: access to capital, retention of experienced talent, and the number of growing companies remaining in the region. With the biggest grievance definitely being the lack of money locally available for growing startups, FortyX80 has introduced two initiatives to help resolve this issue by directly connecting entrepreneurs with investors.

First, we will be introducing non-local investors to the local deal flow by hosting them in Pittsburgh to learn about and meet our thriving community firsthand. Second, we’ve started organizing several trips per year to other cities for promising startups to prove the vitality of the Pittsburgh startup scene to new press and investment communities.

Another common stumbling block on the entrepreneurial journey is a lack of early-stage direction or credible resources. In order to build sustainable businesses and become effective leaders, entrepreneurs need financial, legal and business acumen. Ensuring these critical competencies are met helps a thriving ecosystem mature even further.

We’ve partnered with the Angel Resource Institute to hold sessions to encourage and support new entrepreneurs. So far, we have hosted four sessions during CREATE 2015 Festival, which all sold out in a matter of days, that included topics such as “Pitching to Investors” and “Trends in Raising Capital.”  The path towards a successful business is not linear– the more tools we can provide founders (and investors), the better equipped they will be to navigate a complicated entrepreneurial journey.

In the introduction to the 2015 Index, the Kauffman Foundation acknowledges that “entrepreneurship is a complex phenomenon, and [they] expect to further build out and enhance the Index in the coming years.” The Startup Activity is “the first of various research installments under the umbrella of the new Kauffman Index of Entrepreneurship.”

Future reports will consider, among others, a few variables that may reflect more positively on Pittsburgh’s entrepreneurial community:

  • Venture Growth

  • Density of Scale-Ups    

  • Survival Rates    

  • Percent of Business Owners in the Population

The Pittsburgh entrepreneur community knows that there is a lot of work to do to make the Steel City a true player in the startup world, but we also know that the necessary work has begun. Our goal at FortyX80 is to work together with Pittsburgh leaders, organizations, and entrepreneurs to make sure it not only continues, but thrives and grows exponentially.