NBER WORKING PAPER SERIES NOWCASTING AND PLACECASTING ENTREPRENEURIAL QUALITY AND PERFORMANCE

A central challenge in the measurement of entrepreneurship is accounting for the wide variation in entrepreneurial quality across firms. This paper develops a new approach for estimating entrepreneurial quality by linking the probability of a growth outcome (e.g., achieving an IPO or a significant acquisition) as a function of start-up characteristics observable at or near the time of initial business registration (e.g., the firm name or filing for a trademark/patent). Our approach allows us to characterize entrepreneurial quality at an arbitrary level of geographic granularity (placecasting) and in advance of observing the ultimate growth outcomes associated with any cohort of start-ups (nowcasting). We implement this approach in Massachusetts from 1988-2014, yielding several key findings. First, consistent with Guzman and Stern (2015), we find that a small number of observable start-up characteristics allow us to distinguish the potential for a significant growth outcome: in an out-of-sample test, more than 75% of growth outcomes occur in the top 5% of our estimated quality distribution. Second, we propose two new economic statistics for the measurement of entrepreneurship: the Entrepreneurship Quality Index (EQI) and the Regional Entrepreneurship Cohort Potential Index (RECPI). We use these indices to offer a novel characterization of changes in entrepreneurial quality across space and time. For example, we are able to document changes in entrepreneurial quality leadership between the Route 128 corridor, Cambridge and Boston, as well as more granular assessments that allow us to distinguish variation in average entrepreneurial quality down to the level of individual addresses. Third, we find a high correlation between an index that depends only on information directly observable from business registration records (and so can be calculated on a real-time basis) with an index that allows for a two-year lag that allows the estimate of entrepreneurial quality to incorporate early milestones such as patent or trademark application or being featured in local newspapers. Finally, we find that the most significant “gap” between our index and the realized growth outcomes of a given cohort seem to be closely related to investment cycles: while the most successful cohort of Massachusetts start-ups was founded in 1995, the year 2000 cohort registered the highest estimated quality. Jorge Guzman MIT Sloan School of Management 100 Main Street, E62-343 Cambridge, MA 02142 jorgeg@mit.edu Scott Stern MIT Sloan School of Management 100 Main Street, E62-476 Cambridge, MA 02142 and NBER sstern@mit.edu 3 “When any estimate is examined critically, it becomes evident that the maker, wittingly or unwittingly, has used one or more criteria of productivity. The statistician who supposes that he can make a purely objective estimate of national income, not influenced by preconceptions concerning the ‘facts’, is deluding himself; for whenever he includes one item or excludes another he is implicitly accepting some standard of judgment, his own or that of the compiler of his data. There is no escaping this subjective element in the work, or freeing the results from its effects”. Simon Kuznets. National Income and its Composition, 1919-1938. Volume I. p. 3. (1941) A central challenge of economic measurement arises from the inevitable gap between the theoretical rationale for an economic statistic and the phenomena being measured. Not simply an abstract concern, the ability to reliably and systematically link economic phenomena closely linked to productivity or economic growth is central to the ability of policymakers and researchers to evaluate policy or understand the drivers of economic performance. These concerns are particularly salient in the measurement of entrepreneurship. Though entrepreneurship is often cited by economists and policymakers as central to the process of economic growth and performance (Schumpeter, 1942; Aghion and Howitt, 1992; Davis and Haltiwanger, 1992), measuring the “type” of entrepreneurship that seems likely to be associated with overall economic performance has been challenging. While studies of high-performance ventures primarily rely on samples that select a population of firms that have already achieved relatively rare milestones such as the receipt of venture capital, broader population studies of entrepreneurs and small business emphasize the low growth prospects of the average selfemployed individual (Hamilton, 2000; Hurst and Pugsley, 2011). As emphasized by Schoar (2010) in her synthesis of entrepreneurship on a global basis, there is a gap between the small