KfW/ZEW Start-up Panel: The Economic Upswing Does Not Stimulate All Start-Ups

The strong economic growth in 2010 and the good situation on the labour market had no coherent impact on economically active start-ups and on young companies: In 2010, many start-ups were founded which would presumably not have been established during an economic crisis due to poor prospects of success. These start-ups were less innovative, had lower sales, and created fewer jobs than start-ups in the year before. Start-ups established before and during the financial and economic crisis benefited from the upswing. These are the main findings of the KfW/ZEW Start-Up Panel, presented by chief economist of the KfW Bankengruppe Dr. Norbert Irsch, head of the research department of Industrial Economics at the ZEW, Dr. Georg Licht, and head of the economic research department of Creditreform, Michael Bretz.

Despite of the favourable economic situation, start-ups established in 2010 created 90,000 full-time equivalent jobs less (with a total of 460,000 jobs, including the founding persons) than start-ups established the year before. “In general, longer-established firms offer a greater job security as well as higher wages. Hence, new start-ups were less attractive for job-seekers in the previous year. Because of that, it was probably difficult for start-ups to find qualified employees”, said Dr. Georg Licht. Lower sales do also reflect the smaller size of young companies: start-ups on average had a sales volume of 144,000 euros during their first business year, while the sales volume of start-ups established the year before had on average amounted to 192,000 euros.

Moreover, they were less innovative: only 12 per cent of the start-ups in 2010 started their business activity with market novelties as opposed to 16 per cent in 2009. Presumably, many newly founded companies expected to attract a sufficiently high number of customers with established products, due to the favourable macroeconomic demand situation.

As opposed to start-ups, companies in their second to fourth business year benefited from the economic upswing. They had higher sales than companies of the same age in the previous year (average 2010: 355,000 euros, 2009: 300,000 euros) and could create employment nearly as quickly as companies could the year before (full-time jobs on average at the end of 2010: 3.6, 2009: 3.5). However, companies between their second and fourth business year reduced innovation activities and spent on average less on research and development (2010: 33,000 euros, 2009: 41,000 euros).

The investment climate for young companies slightly improved in 2010 compared to the year before. There were more companies between their second and fourth business year investing (2010: 64 per cent, 2009: 54 per cent), even though they did not expand their investment volumes compared to the year before (Median with 10,000 euros each). “Investments are essential to build up a capital stock, which helps young companies to cope successfully with future challenges”, said Michael Bretz. “For that reason, it is good news that young companies increased their investment efforts and raised the level of economic activity on their respective markets in 2010. ”As expected, the difficulties in obtaining financial resources decreased in the previous year due to the economic upswing. Especially older start-up cohorts had less difficulties to procure financial means from external sources so that the number of companies between their second and fourth business year reporting difficulties in financing declined by 4 percentage points to 12 per cent. Start-ups, however, complained about financing difficulties to nearly the same extent in 2010 as in the year of the crisis, 2009 (2010: 23 per cent, 2009: 25 per cent of all start-ups). “New start-ups have no company history and no evidence of their market acceptance, which makes external financing risky and commercial banks act carefully, regardless of the economic situation”, said Dr. Norbert Irsch. “This makes reliable funding programmes for start-ups crucial – when times are favourable and even when times become difficult –, so that adequate financing is available to new business projects and ideas.” In the next three years, 71 per cent of the economically active young companies plan to expand their volume of sales. However, these figures refer to an assessment given in the early summer of 2011. Given the obvious signs for an end of the economic upswing, the optimistic results of this assessment probably have to be reconsidered, but they are still an evidence of the positive medium-term expectations of young companies.

KfW/ZEW Start-up Panel (KfW/ZEW-Gründungspanel)

The KfW/ZEW Start-up Panel originates from a cooperation of the Centre for European Economic Research (ZEW), the KfWBankengruppe (KfW banking group) and Creditreform. This longitudinal data set is the first of its kind in Germany. It allows studying the development of start-ups for several years and provides a wide range of firm-specific information. The annual sample of about 6,000 firms is based on economically active start-ups, i.e. new firms which are either recorded in the commercial register, have had recourse to external capital, trade credits or similar funds, or are included in the economic process in any other way. The start-ups captured in this way tend to be larger than start-ups in general which also include side businesses and freelancers.

For further information please contact

Dr. Helmut Fryges, Phone +49 0621/1235-189, E-mail fryges@zew.de