The Secret Of Business Success

Pablo Delcan for BI

What makes a successful business successful? Every management consultant and startup founder and financial analyst can tell you, and they'll all tell you something different. Service leadership! Culture of innovation! Diverse workforce, sound business fundamentals, the quality of the snacks in the break room — who knows?

Now, in the biggest undertaking of its kind, a bunch of economists have compiled a comprehensive database of the origins and fates of 50 million American companies. Which ones, they wanted to know, became the largest employers in their industries? Which ones succeeded?

The team's leader, John Haltiwanger, is an economist at the University of Maryland who studies "dynamism." That means he seeks to understand changes over time — why some things surge while other things flame out. He and his team looked at the lifespan of American companies founded from 1981 to 2022. They examined an impressive range of factors: owner demographics, management structure, startup financing, profitability, even the aspirations of the founders. It's nothing less than a complete accounting of what turns a business into a behemoth — "the best database in town," as Haltiwanger puts it.

So, O great and powerful database, what makes the numbers go up and to the right? What makes a company successful?

The answer — you will be shocked to hear — is money.

The strongest correlation between business success and the factors Haltiwanger analyzed is how much financing a company is able to raise before it launches. Starting with $1 million boosts the probability of success by a whopping 25 percentage points. It's like the old Steve Martin joke: Here's how to become a millionaire: First, get a million dollars.

But Haltiwanger found that it also matters where the money comes from. If you self-finance with credit cards, your chances of success actually decrease by 2 points. If you get a loan from a bank, your chances improve by 9 points — but that's been harder and harder to do over the past couple of decades. So the best bet is if you're backed by venture capital: VC investment increases your chance of success by 5 points.

Just as Silicon Valley is always boasting, venture-backed startups really have been the most economically dynamic and productive companies in America. They have the most innovation, the most patents, the biggest R&D budgets. And they have often grown to have the most employees — the metric that Haltiwanger's team used to indicate success.

And therein lies a problem: Almost no one gets venture capital. Of the 1.5 million companies that launch every year, only a few thousand are blessed with VC investment. And the best way to get venture capital, Haltiwanger found, is to be a young, white man.

Now, Haltiwanger isn't the first to discover venture capital's built-in bias. As I've written, VCs are mostly white and mostly male, and they tend to give money to people they know and like, who turn out to also be mostly white and male. Last year, four out of every five venture deals went to an all-male founder team.

But Haltiwanger's study confirms the pattern. Women and nonwhite owners, he found, are less likely to have outside investors — and young founders are more likely to have them. The secret to succeeding in business, the data shows, essentially boils down to: Be a tech bro who gets money from other tech bros.

"There's so much that has to go right for you to be successful," says Florian Ederer, an economist at Boston University who studies startups. "That's always going to privilege people with better networks and better initial starting conditions."

I know! Not great. The data confirms the lived experience of millions of entrepreneurs: The richer you start off, the richer you're likely to get.

But Haltiwanger hopes to use his database to answer a question even deeper than why some companies succeed. That is, why more and more companies don't. Haltiwanger's data shows that the legendary energy of Silicon Valley startups — the origin story of a couple of geniuses back in the 1980s building something in a garage that metastasized into an Apple or a Microsoft or a Google — well, that just isn't happening much anymore. The VC money is still there; the dynamism ain't.

Young, fast companies used to be major sources of employment. In 1981, 15% of working Americans were employed at companies four years old or younger. In 2022, Haltiwanger's team found, it was down to only 9%. And those companies aren't growing as fast as they used to. In 1999, the most dynamic companies outstripped the median rate of growth by 30%. By 2012, they were expanding at pretty much the same rate as other companies.

If the tech sector were as dynamic as it was back in the 1990s, when a cohort of startups grew into Big Tech, it would be sending a constant stream of new challengers onto the field. But that hasn't happened. "Have we seen a remarkable cohort like that in a while?" Haltiwanger says. "The answer is no — and we don't know why." Figuring that out, he adds, will take some more number crunching. But he has some theories.

Theory No. 1: Maybe people are starting different kinds of small businesses nowadays — not high-tech firms, but things like restaurants and pool cleaner services and yoga studios. Those businesses are more likely than tech firms to be owned by women and people of color. From 2002 to 2021, Haltiwanger found, the share of young companies run by women rose from 10% to 18%, while those run by people of color jumped from 10% to 27%. But those owners almost never get venture funding, and they're more likely to self-finance with credit cards. So they're less likely to get big, the way tech companies do.

Theory No. 2: Now that a handful of companies like Google and Meta dominate the tech landscape, maybe the kind of people who might otherwise have been hard-charging founders are instead getting high-paying, low-stress gigs in Big Tech. After all, the older, slower-growing companies are where the jobs are. Small businesses got less dynamic, in other words, because a few big companies now employ all the aspiring dynamos.

Theory No. 3: Big Tech companies aren't just employing all the talent — they're also buying up all the most promising startups. In the late 1980s and early 1990s, innovative startups were more likely to go public than get purchased; by 2001, the reverse was true. In 2019, there were only 100 IPOs — compared with 900 acquisitions. Most of the startups were bought by the half-dozen Big Tech companies you'd expect. The newbies didn't get big. They got eaten.

Why aren't startups growing as fast as they used to?

The question Haltiwanger is asking — why young companies aren't growing as fast as they used to — is an important one. Before 2000, when businesses were able to get bigger, America's aggregate productivity growth was a bit more than 2%. Since then, it's more like 1%. Less dynamism acts as a brake on the economy.

Now, it's possible that all those little startups swallowed by the bigger companies are still creating intellectual property and jobs and new products, goosing the economy in ways the numbers have missed. "The evidence is not definitive yet. That's something we want to go investigate," Haltiwanger says. "But if innovation was proceeding in the same way as before — startups were contributing as much as they did before, just in a different way — then why is productivity growth so low? Something has changed."

Which brings us to Theory No. 4. Maybe, Haltiwanger thinks, the lull in business growth is a good thing. Maybe, just maybe, it's the calm before the innovative storm.

The conventional story, as told by Silicon Valley, is that tech startups got big thanks to the bold, risk-taking vision of the venture capitalists backing them. Haltiwanger thinks it's more complicated than that. For one thing, startup-driven productivity and tech innovation happened long before the invention of modern venture capital. And for another, periods of innovation are usually preceded by a noticeable lag in growth. Go back and look at industries that boomed in the past century — chemicals, cars, robotics — and you see that there's a period of dormancy before the new tech gets implemented at scale. Startups quietly work out the kinks in their crazy ideas, bursting forth like cicadas when the tech is ready.

If that's true, Haltiwanger theorizes, maybe the current slump in business growth is a signal of a boom to come. And maybe this time around, the new tech that's about to explode on the scene is artificial intelligence.

"We are clearly seeing a surge in startups in the last few years," Haltiwanger says. "We see in the data that it is closely tied to AI. The really hard question is: Is this 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?" That's what Haltiwanger is looking to answer with his monster database. The productivity slowdown of the past 10 years might just be the shakedown period before an explosion of nifty new AI stuff, and we'll experience another period of dynamism.

Of course, explosions also cause a lot of damage. Cheaper and lighter AI systems from China like DeepSeek could nullify the capital-intensive machinations of wannabe incumbents like OpenAI. Or AI could eliminate millions of jobs, sparking all sorts of economic upheaval. Or the most innovative AI startups could get consumed by the Microsofts and Googles before they're able to grow into tech giants of their own. The economy might get more dynamic with the rise of AI. But if the new technology moves fast and breaks things, as so many of its predecessors have, will that still count as success?

Adam Rogers is a senior correspondent at Business Insider.