Minnesotans lag in new business starts, Kauffman index finds

Minnesotans started fewer new businesses in 2012 than people in any other state, a troubling trend for a state with an economy built on homegrown business.

Roughly 150 out of every 100,000 Minnesotans started a new company in 2012, according to the Kauffman Foundation's annual index of entrepreneurial activity, published this week. That compared with a U.S. average of 300 per 100,000.

Minnesota's showing was the lowest in the nation and the state's worst since Kauffman started tracking the index in 1996.

"We ought to be thinking about why this is the case," said Bill Blazar of the Minnesota Chamber of Commerce. "Our rate of innovation has not come back to the level that it was before the recession, and that's troubling to us."

The findings square with chamber surveys of Minnesota businesses to see if they plan to roll out new products and services, Blazar said. The number of executives who say yes has not recovered to prerecession levels, suggesting the Kauffman index isn't the only reason to believe business innovation is suffering in the state.

Kauffman's researchers used census data to estimate the percent of people between 20 and 64 who started a business in 2012. Entrepreneurial activity declined across the country, the foundation said. The number of businesses created per month fell by about 29,000 compared with 2011.

Across the Midwest, states earned weak marks in the index, the exception being Indiana. Nebraska, Michigan, Wisconsin and Ohio rounded out the bottom five.

"It's likely not a coincidence that the number of new businesses created dropped when the economy improved last year," said Dane Stangler, director of research at the Kauffman Foundation, which is based in Kansas City, Mo., and focuses its research on entrepreneurship and education. "While a stronger economy is good for business growth, it also means the unemployed find jobs instead of starting firms."

If job creation slows entrepreneurship, then Minnesota would do poorly in Kauffman's index, said Tom Stinson, the state economist. Minnesota's job growth has outpaced the nation, while the unemployment rate in the state is more than 2 percentage points lower than the national figure.

There are two major elements to a healthy business climate, Stinson said. One is creation of businesses, but the other is a low failure rate. A business that keeps failing can contribute positively to new-business-creation numbers, he said, but that doesn't necessarily mean a positive economic outcome.

For instance, a bar that changes hands every six months because nobody can make it profitable might get a new owner every six months. But that's nothing to celebrate, Stinson said. "The net is really what we're concerned about, not the gross," he said.

Kauffman breaks out the national statistics for business creation by demographic group. The overall decline across the United States was driven by men, whose entrepreneurial activity fell from 0.42 percent in 2011 to 0.38 percent in 2012. The numbers were unchanged for women, at 0.23 percent.

Minnesota hasn't always performed poorly in the index. It ranked 10th in the nation by the same measure in 1998, and as recently as 2007 finished at No. 23. But since the recession hit in late 2007, the state has fallen to the bottom.

Minnesota's showing could reflect the increasing difficulty in launching medical device businesses, historically Minnesota's key sector for innovation, said Dan Carr, who heads up the Collaborative, a Minneapolis organization that offers conferences and consultation to help growing businesses. The biggest complaint from med-tech start-ups is the lengthy regulatory process.

"If our numbers keep slipping a little bit, then I would say that's reflecting this more-than-cyclical change to the medical device innovation climate," Carr said. "It's just darn hard to get med-tech deals to the finish line, harder than it was five and 10 years ago."

But Carr said the business climate in the Twin Cities seems better than the Kauffman index indicates. The state enjoys the eighth-highest level of employment backed by venture capital, he said.

Earlier this month, Carr held a conference on how to attract and negotiate private equity investment. More than 200 people paid to attend on a snowy weekday morning.