The Secret Sauce of Success: Money, Networks, and the Future of Business
What truly makes a business successful? Is it innovative leadership, a culture of endless creativity, or maybe even the quality of office snacks? The answers, as it turns out, are more complex than they seem.
In a groundbreaking undertaking, a team of economists has compiled an extensive database tracking the origins and trajectories of 50 million American companies. The goal? To understand what separates the industry giants from the rest. Led by John Haltiwanger, an economist at the University of Maryland who specializes in “dynamism”—the study of change over time—the team examined businesses founded between 1981 and 2022. Their analysis encompassed a wide array of factors, from founder demographics and management structures to initial funding and long-term profitability. The result is a comprehensive overview offering insight into what truly transforms a company into a dominant force.
The Power of Funding: The Strongest Predictor of Success
So, what does the data reveal about the ingredients of success? The surprising conclusion is that money is a critical factor. Haltiwanger’s analysis shows that the most significant correlation with business success is the amount of funding secured before launch. Securing $1 million in early funding can boost a company’s chance of success by an impressive 25 percentage points.
However, it’s not just about the amount raised; the source of the money also matters. Self-financing through credit cards, for instance, actually decreases the chances of success. Bank loans improve the odds, but secure financing can be very difficult. The best bet? Venture capital. Receiving VC investment increases a company’s chance of success by 5 points.
As Silicon Valley often boasts, venture-backed startups have frequently been the most dynamic and productive businesses in America. They foster innovation, generate patents, and boast substantial R&D budgets often growing to become major employers—a key metric the study used to gauge success.
The VC Bias: A Barrier to Entry
And this is where we encounter a significant problem: access to venture capital is severely limited. Only a select few thousand of the 1.5 million businesses that launch each year receive VC backing. Furthermore, a key finding of the study is that the most likely recipients of this crucial funding are young, white men, echoing an established pattern of bias within the industry.
As the data reveals, women and minority business owners are less likely to secure outside investment, while young founders are more likely to receive it. The secret recipe for success, according to the data, often boils down to being a “tech bro” receiving funding from other “tech bros.” As Florian Ederer, a Boston University economist specializing in startups notes, “There’s so much that has to go right for you to be successful… That’s always going to privilege people with better networks and better initial starting conditions.”
The Changing Landscape of American Business
The new study delves deeper than just the question of success, aiming to understand why fewer companies are achieving growth and dynamism. The study’s data reveals that the explosive energy once synonymous with Silicon Valley—the narrative of garage-based startups evolving into tech giants—is becoming less common. While VC funding remains available, the same level of dynamism isn’t being achieved.
Historically, young, fast-growing companies were major job creators. In 1981, 15% of American workers were employed by companies four years old or less. In 2022, the percentage had dropped to 9%. Moreover, these companies are not growing as rapidly. The most dynamic firms in 1999 outpaced the median growth rate by 30%; by 2012, they were expanding at a similar pace as other companies. The tech sector isn’t as dynamic as it was in its early days. In the past, successful companies constantly shook up the market, establishing themselves as dominant players.
The Role of Big Tech: Consolidation and its Consequences
Haltiwanger proposes several reasons for this shift. One possibility is that contemporary small businesses differ from the tech firms of the past, increasingly focused on services like restaurants and yoga studios. While these businesses are more likely to be owned by women and people of color, they don’t usually receive venture funding, often relying on more difficult self-financing methods like credit cards, which hinder their growth.
Another theory suggests that the dominance of companies like Google and Meta might encourage those who would otherwise start their own companies to take high-paying positions in Big Tech instead, because where the mature companies are, the jobs are. In other words, a few big companies today employ all the people who would have been considered dynamic in the past.
Additionally, the study highlights a significant trend: successful startups are increasingly acquired by larger tech companies rather than pursuing independent growth through IPOs. Where there were 900 acquisitions compared to 100 IPOs in 2019, most startups got consumed by the few big companies you would expect. The newcomers didn’t get big; they essentially got absorbed.
The AI Factor: A New Era of Dynamism?
Haltiwanger hypothesizes that it could be the calm before an innovative storm. He notes the existence of a period of dormancy before new technologies are put into place. Perhaps this lull in business growth is a sign of an upcoming boom. And maybe this time around, the new tech that’s about to explode on the scene is artificial intelligence.
As Haltiwanger states, “We are clearly seeing a surge in startups in the last few years…we see in the data that it is closely tied to AI.” The central question is whether this represents “a new platform, a pathbreaking change in the way we do business and the way we work and how we live? Or is it not going to have the same kick as IT?” He hopes to answer these questions with his extensive database.
The slowdown in productivity over the last decade may just be a period of adjustment before innovation in AI, and we see another burst of dynamism. AI has the potential to move fast and break things and the economy could get more dynamic again, but the question remains: How do we define success in this new landscape?
Adam Rogers is a senior correspondent at Business Insider.
