This report was prepared by Ross Gittell, Chancellor of the Community College System of New Hampshire and John Orcutt, Professor of Law at the University of New Hampshire School of Law. Gittell and Orcutt received substantial assistance from business and legal experts throughout New Hampshire, including Bill Ardinger, Rath, Young and Pignatelli, Eric Herr, Commission on Innovation, Efficiency and Transparency in State Government, Jeremy Hitchcock, Dyn, Paul Holloway, Holloway Automotive Group, Paul Montrone, Liberty Lane Partners, Matthew Pierson, Dunn Rush & Co., and Dick Samuels, McLane, Graf, Raulerson & Middleton. The assistance and comments from Ardinger and Samuels was particularly valuable and enlightening. Some of the language used in this report came directly from commenters. Any errors in this report, however, are solely those of Gittell and Orcutt. Sponsor: Coalition for Job Creation and Economic Innovation www.nhbusinessalliance.org 1 | Page IMPROVING NEW HAMPSHIRE’S STARTUP ENVIRONMENT SCIENCE & TECHNOLOGY AND NEW HAMPSHIRE’S ECONOMIC ADVANTAGE The New Hampshire Science & Technology Plan, which is currently being updated,1 identifies New Hampshire among the leading states in making the transition from an industrial to an innovative economy. Over the last six decades, innovation-based development has helped positively transform New Hampshire’s economy. New Hampshire’s strong position in high technology industries—consistently ranking in the top 20 percent of states in high technology industry concentration—has brought numerous tangible benefits to the state, including significantly raising the standard of living for New Hampshire residents as a whole. New Hampshire’s high technology intensity rank = 10th in the nation. Average high technology wages in New Hampshire = $86,314. Average private industry wages in New Hampshire (all industry) = $47,091. New Hampshire’s per capita income rank = 9th in the nation. The plan highlighted that New Hampshire has the opportunity to build on the strength of its innovation system to grow and diversify the state’s economy, create well-paying jobs, and increase economic well-being throughout the state. New Hampshire’s position as an innovative, technologically-advanced economy, however, is being challenged. The current level of high technology employment in New Hampshire has dropped by nearly 25 percent since 2000. During the early 2000s “technology bust,” New Hampshire was the United States’ worst performing state in high technology employment percentage change. The recovery of New Hampshire’s high technology industry since the early 2000s has been weak and below the national average. New Hampshire’s recovery from the 2008-09 recession has been slow. New Hampshire’s job recovery lags Massachusetts and Vermont in the New England region. While Massachusetts has recovered all its lost jobs, New Hampshire has not. This contrasts to New Hampshire’s job recovery in the previous three recessions, when New Hampshire led the New England states. In 2013, New Hampshire tied for 7th worst state in employee perceptions of job creation per the Gallup Job Creation Index. 1 The New Hampshire Science & Technology Plan is sponsored by New Hampshire EPSCoR (http://www.epscor.unh.edu/). New Hampshire EPSCoR advances New Hampshire’s competitiveness in science and engineering by strategically investing in research infrastructure; promoting education in STEM; and partnering with businesses that enhance job creation and economic development. The 2012 version of the New Hampshire Science & Technology Plan, which is available at http://nhepscor.org/STplan, was funded by a grant from the National Science Foundation, # EPS 0701730. 2 | Page The future success of New Hampshire’s economy will be determined by the decisions New Hampshire makes over the next two years. As the national economy gains momentum, New Hampshire has an opportunity to leverage existing innovation strengths and address weaknesses to improve the state’s competitive position and foster high technology industry growth. Without action, New Hampshire will lose out to other states and nations in innovation-based, and overall, economic growth. The New Hampshire Science & Technology Plan highlights a number of areas of declining performance in the state. This policy paper highlights one of the most troubling areas for New Hampshire’s economic future: declining business starts. DECLINING BUSINESS STARTS In the early 2000s, New Hampshire ranked in the top third of states in business starts per 100,000 people. Since 2008, New Hampshire has ranked in the bottom half of states in that category and currently ranks 35th out of 50 states (Table 1). The lack of business starts is clearly not a one- or two-year issue. It has become a fundamental problem for the state and has inhibited its recovery from the last recession. Table 1: New Hampshire’s Declining Business Starts New Hampshire’s rank among the 50 states 2002 2004 2008 2010 2012 Business starts per 100,000 people 14th 16th 35th 30th 35th The business starts indicator is calculated as the annual increase (or decrease) in “employer firms” recorded by the U.S. Census Bureau, Small Business Administration, and U.S. Department of Labor, divided by 100,000 increments of the state’s population. The business starts indicator measures only businesses with at least one employee because it seeks to provide information about job creation. The indicator omits self-employment. New Hampshire had 297 net business starts in 2002 compared to 657 net business closures in 2012 (Figure 1). 3 | Page Figure 1: New Hampshire Business Starts On a regional basis, New Hampshire ranked fifth among the six New England states in 2012 business starts (Table 2). Most significantly, Massachusetts ranked 1st in the nation in business starts per 100,000 people. This has contributed significantly to Massachusetts leading New England and being one of the strongest performing economies in the nation coming out of the 2008-09 recession. New Hampshire went from producing seven fewer business starts per 100,000 people than Massachusetts in 2002 to 62 fewer in 2012. From 2009 through 2012, Massachusetts’ per capita business creation rate was eight times New Hampshire’s rate. Table 2: Business Starts for the New England States 2012 rank among the 50 states Mass. Maine Rhode Conn. New Vermont Island Hampshire Business starts per 100,000 people 1st 4th 25th 29th 35th 36th New Hampshire has been among the worst performing states in business starts for close to ten years. From 2004 through 2011, New Hampshire annually generated an average of 12.2 business starts per 100,000 people, which is almost 50 percent worse than the national average (Table 3). During this same period, Massachusetts, Vermont, and Maine produced significantly more business starts per 100,000 people (Table 3). Table 3: Average Number of Business Starts from 2004 through 2011 2004 through 2011 Mass. United Vermont Maine New Rhode Conn. States Hampshire Island Average Number of Business 28.9 22.9 20.4 18.7 12.2 5.0 1.6 starts per 100,000 people 4 | Page WHY BUSINESS STARTS MATTER A slowdown in New Hampshire business “High levels of entrepreneurship are closely correlated starts bodes poorly for the state’s economic future. with regional economic growth. Places with abundant Young, innovative firms (startups) are some of the most valuable companies a state can have in its new start-ups also experience faster income and economy. They have the ability to grow and employment growth.” become the large, dominant companies of the Edward L. Glaeser (Harvard University) and future. Startups, particularly those that become William R. Kerr (Harvard Business School) medium- and large-size firms, generate a disproportionate amount of the United States’ macroeconomic growth, innovation, and net new jobs. In addition, startups in high-technology sectors are associated with higher value-added productivity and increased exports, which, in turn, leads to business expansion and more skilled, high-wage jobs. With fewer companies being started in New Hampshire, the pool of young, innovative firms will dry up. Startups play the same critical role for New Hampshire. Take for example Dyn, a startup based in the millyard in Manchester, New Hampshire. Dyn solutions are at the core of Internet Performance. Through traffic management, message management, and performance assurance, Dyn connects people through the Internet and ensures information gets where it needs to go, faster and more reliably than ever before. Dyn has more than 13 million users in 242 countries and territories, and its customers include such leading companies as Twitter, Tumblr, Netflix, and Pandora. Over a decade, Dyn has grown from a handful of employees to nearly 300 and opened a new 25,000-square foot office in Manchester, while also opening satellite offices in London, England and San Francisco, California. Dyn’s founders are New Hampshire natives, which led to their building the company in New Hampshire even with the challenges of starting a company in the state. Relying solely on state loyalty for startup success is not a sound economic development strategy. Maintaining a pro-startup environment, should be one of New Hampshire’s top policy objectives. Business starts provide New Hampshire with its future job creators. New Hampshire’s dramatic reduction in business starts is a strong and problematic forewarning of future economic troubles. Namely, fewer business starts today will lead to less job creation and