Entrepreneur support is Minnesota-made

The COVID-19 pandemic changed the realities of entrepreneurship across the United States. Nowhere is that more evident than in Minnesota.

For more than four decades, the state had consistently experienced a decrease in job growth from new businesses. However, Minnesota’s entrepreneurial climate underwent a drastic change with the onset of the pandemic. Today, more new businesses are taking shape in Minnesota, surviving and achieving success at rates higher than much of the country. 

The Minnesota Chamber Foundation’s May 2022 report, “Minnesota Entrepreneurship: A Turning Point,” indicates that Minnesota ranked first in the nation for five-year business survival rates in 2020. 

“While it is difficult to explain Minnesota’s success precisely, its existing industry structure, less volatile environment to capital access and entrepreneurial backgrounds all lend to higher business survival rates,” said Sean O’Neil, Minnesota Chamber of Commerce director of economic development and research, and primary author of “A Turning Point.”

The importance of entrepreneurial growth to Minnesota’s continued economic success and quality of life cannot be understated. According to U.S. Census Bureau data, Minnesota firms in their first five years of existence made up more than 27% of all new jobs in the state. Therefore, continued success in Minnesota, defined by job growth and economic strength, depends on new businesses and the influx of energy they bring. 

Entrepreneur shift
The number of new startups decreased in Minnesota and throughout the country from the late 1970s through 2019. With the onset of the COVID-19 pandemic, Minnesota experienced a contradiction to that startup trend, however. New business applications in Minnesota increased by nearly 30% in 2020 and 2021. “A Turning Point” research indicated while Minnesota is not a leader in the volume of new start-up businesses, it was the best in the nation for five-year business survival rates, as measured in 2020.
At first glance, a low volume of business startups would not appear conducive to a successful record in five-year survival rates. But Minnesota has several inherent advantages that lead to business startup survival.

Historical strength
Most business applications nationally typically come from industries like retail, restaurants and professional services with fewer startup barriers like capital acquisition. However, Minnesota’s new business applications are more concentrated in areas of historical experience, like health care, medical innovation, insurance and value-added agriculture manufacturing. Those industries typically have a larger impact on innovation and growth, which tend toward higher survival rates. 

In addition, Minnesota’s existing economic community is a showcase for the success of homegrown businesses. Of the 16 Fortune 500 businesses headquartered in Minnesota, 14 originated in the state, while the other two began in neighboring Wisconsin and North Dakota. Minnesota’s historical record of individuals and small businesses matching their intellectual abilities to meet market opportunities offers an inherent support system to continue small business development in those sectors. 

“When individuals working in an industry see an untapped opportunity within a niche they are familiar with, anecdotally, you would expect a higher success rate,” O’Neil said. “These individuals have spent years identifying opportunities while building relationships with business leaders with access to the capital and social networks required to succeed.”

Venture capital
As new businesses move past their formative years and seek to expand their operations to meet market needs, they typically require increased funding to support growth goals.

Not surprisingly, Minnesota’s high five-year survival success has corresponded with increased venture capital funding. “A Turning Point” reported that Minnesota startups received a record $1.5 billion in 2020 and completed a record 175 venture capital deals in 2021. With new business applications centered around existing, mature industries, venture capitalists have more confidence these entrepreneurs have the support they need to be successful. 

“The amount of venture capital in Minnesota has increased dramatically in the last five years,” O’Neil said. “We believe that is part of a virtuous cycle, where success drives increased capital presence for startups.”

People and policy
Much of Minnesota’s startup activity prior to 2020 focused on the state’s highly populated regions. With the pandemic, however, entrepreneurial growth was occurring throughout the state. “A Turning Point” indicated that the top five counties with the largest increases in new business applications occurred outside the seven-county metro in 2020.

Continued success will require an emphasis on several areas. Access to an available and skilled workforce is necessary for new businesses to expand and grow. A 2017 publication by the Federal Reserve Bank of San Francisco, “What’s Holding Back Business Formation?” indicated a 1% increase in the number of workers available in the country was associated with a 1% increase in the number of new businesses at the state level. In addition, it found that 90% of the variation in new business starts was due to labor availability. An increased emphasis on workforce attraction and promoting Minnesota’s quality of life for individuals and families will be critical to ensure the necessary workforce is present to support new business growth.

Entrepreneurs are often unaware of the resources that exist to support them. Increasing the presence and awareness of startup support resources to provide funding, networking, mentoring and technical assistance to new businesses in Minnesota is critical to support further entrepreneurship gains in coming years. Initiatives like Launch Minnesota, a program initiated in 2017 by Minnesota’s Department of Employment and Economic Development, are critical to creating a more robust network of services that encourage entrepreneurial success. 

Addressing these structural factors is necessary to foster continued new business formation, startup survival and long-term economic growth. In today’s employment market, where competition for talented workers is exceptionally high, startups require assistance convincing them to leave more mature firms.