Start-ups these days don't necessarily want to be UnitedHealth

The next UnitedHealth Group is probably going to go out of business this month as the founders shut it down rather than try to raise more money to pay June's rent.

Maybe they had a promising start, but it's just so much tougher now to grow a small company into a big one like Minnetonka-based UnitedHealth, sitting atop this year's Star Tribune 100 again at more than $157 billion in revenue.

That scenario, of entrepreneurs finding it much harder to get through adolescence and into corporate adulthood than in the past, was one conclusion from a provocative research report put out this spring by a team at Massachusetts Institute of Technology's Sloan School of Management.

Researchers have long cared about how many start-ups get going, but what these researchers were trying to do was assess what they called "entrepreneurial quality," sifting through factors that would help predict whether a start-up could successfully sink deep roots and grow into a big company.

By that definition, entrepreneurial activity lately hasn't come close to what it was during the 1990s.

"Even as the number of new ideas and potential for innovation is increasing, there seems to be a reduction in the ability of companies to scale in a meaningful and systematic way," wrote the MIT authors, Jorge Guzman and Scott Stern. "Whether this is primarily a challenge for capital markets or reflects systematic reductions in various aspects of ecosystem efficiency remains an important challenge for future research."

Their observation is certainly consistent with what can be seen on the Star Tribune 100, which today looks far thinner at the bottom of the list than it once did. This year's ranking doesn't even get to 100 companies.

The last company on this year's list, Sunshine Heart, is a development-stage company with just $59,000 in revenue. The smallest company on the 1998 list, Thermo Sentron Inc. at No. 100, was a manufacturer that had revenue of nearly $80 million. This is not some trend seen only here, of course. The Wilshire 5000 — the stock index meant to reflect the value of all of the trading, publicly held companies in the United States — is also short about 1,400 companies from the 5,000 suggested by its name.

The simple explanation is that there are far fewer new public companies to replace those that have been taken over or that have gone out of business. There were more than 200 venture-capital-backed companies that went public in both 1999 and 2000, the period known as the dot.com bubble. In the first quarter of 2016, there were just six.

Among the people not concerned about these numbers, at least for now, is University of Minnesota professor Daniel Forbes.

Forbes suspects one of the factors is that entrepreneurs and private investors have recognized that in addition to the higher cost of being a public company, the public market is an increasingly inhospitable place for smaller companies to do business. One reason is that shareholders insist CEOs do nothing other than pursue simple, short-term growth strategies.

He noted that an activist shareholder just demanded that the music streaming company Pandora sell itself, even though Pandora's CEO has patiently explained that his strategy of getting more paid subscribers will take a while to pay off.

Forbes said Jeff Bezos had that same message for Amazon.com shareholders in the 1990s.

"People wanted Amazon to be profitable much sooner than it was," Forbes said. "He said, 'Trust me, be patient. I don't want to be done with books. I want to go into electronics and toys and all of these other categories.' Now that looks like an obvious decision, but at the time he really had to hold the line."

Entrepreneurs still want to cash out investors, he said, just not by providing them a publicly traded stock.

"A lot of people now start businesses with the express intent of selling to UnitedHealth," he added.

That's one aspect of what he called a "division of labor" that's become increasingly apparent looking at big companies and the start-ups in their industries. Bigger companies have learned how to buy small ones and quickly grow them, applying the kind of skills at sales, operations and finance they developed to stay on top of their far-flung, multibillion-dollar operations.

Smaller upstarts, meanwhile, remain where the most innovative products and services come from.

That kind of consolidation activity also explains why the top 10 companies of 2016 have more than three times the revenue as the 10 at the top of the 1998 ranking. Medtronic PLC is more than 11 times larger than it was then, fueled by acquisitions including Covidien. Annual revenue for St. Paul-based Ecolab is more than eight times greater than it was then.

It's not easy for big companies to keep growing rapidly, but it's worth noting that UnitedHealth just was awarded a five-year contract worth nearly $5 billion in revenue. That happens to be about the same amount as the combined annual revenue of the 42 companies that formed the bottom half of this year's Star Tribune 100.

lee.schafer@startribune.com • 612-673-4302