Innovation and Entrepreneurship in Washington by the Numbers

Whatever your view of Washington’s relative strengths and weaknesses as a place for innovation and entrepreneurship, there’s a new report out to help underpin your argument with data.

Washington came in at a surprisingly low 38th in the Kauffman Foundation’s 2015 index of startup activity nationally, released Thursday. That’s down from 32nd last year. The index ranks states in categories including the rate of new entrepreneurs and startup density.

In Washington, 240 out of every 100,000 adults are counted as entrepreneurs in any given month. Of those, about 76 percent were employed before starting their business, which Kauffman says is an indication of how many people chose entrepreneurship because they saw new market opportunity, as opposed to starting their own thing because they couldn’t find a job.

The rate of startup companies in Washington per 100,000 people—146 in 2014—has hovered near all-time lows for the last four years. The general down-and-to-the-right trend of these measures for Washington state runs a bit counter to the current boom-town feel of Seattle.

Kauffman Index – 2015 – Startup Activity – State Profile

The Seattle-Tacoma-Bellevue metro area fares better than the state as a whole. It ranked 16th among metropolitan areas in the Kauffman Index, an improvement from 17th last year. (The Kauffman Foundation is an Xconomy underwriter.)

Meanwhile, the Technology Alliance, a Washington tech industry and policy group, released its report Friday comparing Washington’s entrepreneurial climate, research capacity, and education systems against 11 states—California, Colorado, Connecticut, Maryland, Massachusetts, Minnesota, New Jersey, New York, Texas, Utah, and Virginia—with which Washington competes “for the talent, investment, and infrastructure that support a thriving innovation economy.” The Technology Alliance holds its annual “State of Technology” luncheon Friday.

The report is little changed from years past: Washington does well in attracting venture capital, but underfunds basic research and education.

There’s not much sense in comparing the two reports directly, as they measure different things, using different data, from different time periods. The Kauffman Index, for example, focuses on entrepreneurship more broadly, including restaurants and franchises. It also ranked states like Montana highly because of growing economic activity related to oil and gas extraction, as Jon Talton reports at The Seattle Times.

The Technology Alliance, meanwhile, focuses on just what it’s name suggests: the tech sector.

But in case you’re wondering, Washington ranked ahead of only two of its “peer states”—Minnesota and Virginia—in the Kauffman Index. Non-peers such as Mississippi and South Dakota ranked higher. (One cool local tie in: the Kauffman Index interactive data visualizations are done using Tableau Public, from Seattle-based Tableau Software.)

The Technology Alliance report is a helpful measure of Washington’s ingredients for innovation and entrepreneurship.

It cites Washington’s relative position in venture capital investment (fifth among its peer states in dollars last year, $1.25 billion; sixth in number of deals, 113) and venture-capital backed exits (fifth again, with 27 last year, a small increase from 2013). Washington’s share of total VC investment is down almost a full percentage point since 2012. Companies in the state claimed 2.6 percent of all investment nationally in 2014.

Right now, we’re seeing local venture capital firms including Madrona Venture Group and Ignition Partners easily replenish their coffers, ensuring a few more years of locally managed investment capital for the best Northwest startups.

That capital seeks out good ideas and technologies, as well as the talented people to develop them into real businesses. Those are the two other ingredients the Technology Alliance report measures.

Tech giants Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT) help bolster Washington’s rankings in research capacity. Those two companies alone had a combined research and development budget in 2014 of more than $20 billion. (But those numbers should be taken with a grain of salt: At Microsoft, for example, R&D spending includes product development and intellectual property creation, as well as the Microsoft Research organization, which is based in Redmond, WA, but operates significant research hubs around the world.)

Meanwhile, public support for the kind of early stage research upon which a startup might be built is lagging—a “deep cause for concern,” the Technology Alliance says. A small but important example is the annual struggle to save the Life Sciences Discovery Fund.

The state does have the $1.2 billion in research funding to the University of Washington; $1.02 billion at Pacific Northwest National Laboratory; $341 million at Washington State University; and $314 million at Fred Hutchinson Cancer Research Center. But at most of these institutions, the majority of funding comes from federal rather than state sources. And research spending at all of them except WSU is still shy of 2010-2011 peaks, when federal grants were flowing from the American Recovery and Reinvestment Act.

Washington is a net importer of technology talent. Back in 2007, the state was bringing in a net of 8.4 people with a bachelor degree for every 1,000 workers. The report doesn’t have more recent figures, but anecdotes abound, and I’d be surprised if Washington isn’t importing more technology talent today. It needs to: 9.2 percent of all jobs in the state are in STEM fields—science, technology, engineering, and mathematics. Many workers are coming to populate the numerous and growing branch offices of the technology companies that have opened in the Seattle area over the last five years, or to work for Amazon. The size and scope of the local tech industry has changed dramatically. Madrona managing director Matt McIlwain said this week that it’s much easier to convince people to move to Seattle to work at a startup than it was 15 years ago.

But the pathway to those jobs for Washington kids remains fraught, largely due to chronic under-investment in the state’s education system. Only 76 percent of students entering high school in Washington graduated on time in 2013—ranking the state a dismal 42nd nationally, down from 31st in 2010.

Washington’s higher education system also ranks in the bottom half of the peer group for graduates with bachelor and advanced degrees in STEM fields. The state ranked 49th for higher education funding per full-time student.

Check the reports out for yourself, and make your argument: Is it the best of times for entrepreneurship and innovation in Washington, or are we losing our edge?

 

Benjamin Romano is editor of Xconomy Seattle. Email him at bromano [at] xconomy.com. Follow @bromano

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