MIT-Trained Entrepreneurs Create Businesses With $2 Trillion a Year in Sales, Kauffman Report Says

2/17/09Follow @wroush

It’s no secret that the Massachusetts economy benefits from the presence of large, prestigious, star-studded universities and the companies started by their faculty and graduates. In fact, these universities take every opportunity to remind people of their importance: Just a few weeks ago, Harvard put out a report
taking credit for nearly $5 billion in economic activity around the Boston area in fiscal 2008.

But it turns out that area universities may not be tooting their own horns loudly enough. Companies founded by the alumni of a single university—MIT—are responsible for more than a quarter of all sales by Massachusetts companies, or some $164 billion per year, according to a report released today by the Kauffman Foundation. If the revenues of all active companies around the world formed by MIT graduates were aggregated, the study estimates, they’d surpass $2 trillion a year—which is more than the gross domestic product figures of all but the 10 largest nations in the world.

The study, which will be released in full this morning at a briefing in Washington, D.C., was conducted by MIT Sloan School of Management professor Ed Roberts and doctoral candidate Charles Eesley. The point wasn’t just to cheer for the home team, but to build a detailed, quantitative picture of how one university’s entrepreneurial alumni—especially those in technology fields—contribute to regional economic growth. “We found that the MIT alumni-founded companies have a disproportionate importance to their local economies because so many of them are manufacturing, biotech, software or consulting firms that sell to national and world markets,” Roberts said in a statement.

Entrepreneurial Impact Study: Cover PageThe Kansas City, MO-based Kauffman Foundation, which focuses its spending on programs that foster entrepreneurship and innovation, paid for the study in part because it needed more ammunition in its fight to get more universities and state and local governments to support university-industry exchanges, says Lesa Mitchell, a vice president at the organization.

“Though everyone might tire of hearing about MIT, the reality is that they continue to encourage the things in terms of university-industry collaboration that we fear are really getting broken in other places,” Mitchell says. She points to efforts such as the Deshpande Center for Technological Innovation at MIT, which provides seed grants for proof-of-concept work by MIT faculty and graduate students and matches MIT innovators with experienced business mentors.

“There out outcries in Washington about too much interchange between universities and industry,” Mitchell says. “But in fact, it’s industry that is leading the idea process, and it’s the relationship between universities and industry that allows that to happen, because as ideas get funded and supported in the university they will spill over and land either in small companies or big companies. Having that porous boundary, we think, is unbelievably critical.”

On average, MIT graduates form just under 1,000 companies every year, according to an executive summary of the report shared with the media before today’s announcement. Massachusetts is home to some 6,900 alumni-founded companies, while another 18,900 are scattered around the world, including 4,100 in California. MIT alumni-founded companies employ just under a million people in Massachusetts, 526,000 in California, 231,000 in New York, 184,000 in Texas, and 136,000 in Virginia, the study found.

The study expands on a similar report about MIT’s economic impact published in 1997 with funding from BankBoston (now part of Bank of America). The earlier study was apparently far less thorough: it turned up only 4,000 companies founded by MIT alumni, with annual world sales of just $232 billion. The new study was based on a 2003 survey of all living MIT alumni, combined with revenue and employment data current through 2006 from Compustat and Dun & Bradstreet.

A few of the report’s highlights:

* Together, Massachusetts and California claim just under two-thirds of the high-tech firms founded by MIT alumni. Those two states are home to 66 percent of MIT alumni firms in the electronics industry, 62 percent in software, and the same percentage in pharmaceuticals and medical devices.

* Out of the 493 life sciences faculty at MIT (counting the Broad and Whitehead Institutes), 66 have founded or served on the board of directors of at least one venture-funded company. Another 50 serve on scientific advisory boards.

* MIT is an efficient magnet that draws company founders to Massachusetts. Only one-tenth of MIT undergraduates grew up in the Bay State, but more than one-third (38 percent) of all software, biotech, and electronics companies formed by MIT alumni are located in Massachusetts.

* About 30 percent of the foreign students who have attended MIT have gone on to form companies. At least half of these—some 2,340 firms, employing more than 100,000 people—are headquartered in the United States.

The report credits MIT’s influence on the local and national economies to a vigorous “entrepreneurial ecosystem.” This network includes organizations and initiatives like the Deshpande Center, the MIT Enterprise Forum, the MIT Entrepreneurship Center (which Roberts chairs), the MIT Technology Licensing Office, the MIT $100K Business Plan Competition (whose winners have gone on to form at least 120 companies), and the MIT Venture Mentoring Service (which has helped give birth to 88 companies since it was formed in 2000).

While MIT’s ecosystem of entrepreneurship may be unique, that doesn’t mean it can’t be emulated, says Mitchell. “The Kauffman Foundation just gave the largest grant it has ever given to the University of Kansas to develop a Deshpande-type model,” she says. “We’re also working with universities in California and Arizona to create venture-mentor models. Frankly, part of the reason we’re so supportive of a report like this is that it’s finally somebody else besides the Kauffman Foundation saying that it’s important to have this data and to build these models.”

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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