Entrepreneurship in Silicon Valley During the Boom and Bust

by Robert Fairlie, University of California, Santa Cruz, CA 95060

2006 [52 pages]. Under contract no. SBAHQ-05-M-0409

This report was developed under a contract with the Small Business Administration, Office of Advocacy, and contains information

and analysis that was reviewed and edited by officials of the Office of Advocacy. However, the final conclusions of the report do not 

necessarily reflect the views of the Office of Advocacy.

Purpose

The purpose of this study is to understand the 

impact of tight labor markets on the high-tech 

industry and its effect on entrepreneurship in 

Silicon Valley during the boom and bust. This 

report uses a new measure of entrepreneurial 

activity to study entrepreneurship from 1996 to 

2005 in Silicon Valley known as “The Kauffman 

Index of Entrepreneurial Activity" (KIEA). This 

new measure captures the rate of business creation 

at the individual owner level. 

Economic expansion in the late 1990s generated many opportunities for business creation and 

productivity growth, which has been mostly linked 

with investment in information and communication technologies. Regions with large concentration of high-tech industries in the San Francisco, 

San Jose, and especially the Silicon Valley area, 

placed emphasis on the role of startups and entrepreneurship. This period was set apart by swiftly 

rising stock prices, lucrative stock options, venture 

capital deals, initial public offerings, and tight 

labor markets. Consequently, it is unclear whether 

this was a period of heightened entrepreneurship 

or one in which returns to working in firms discouraged entrepreneurship. 

This paper investigates the effects of tight labor 

markets on entrepreneurship activity in the Silicon 

Valley compared to California and the United States.

Overall Findings

The study finds that entrepreneurship rates in 

Silicon Valley were higher than in the rest of the 

United States during the expansion period of the 

late 1990s. During this time period, entrepreneurship rates increased in the Silicon Valley while 

the national rate remained constant. The study 

points out that entrepreneurship was higher after 

the dot com bust in Silicon Valley than during 

the boom period. 

The findings indicate that demographic characteristics of the population and economic conditions are important at least in terms of potentially 

creating high rates of entrepreneurship. Silicon 

Valley entrepreneurship rates as a whole appear to 

have been suppressed by the extremely tight labor 

markets during this period. 

Highlights

• High-tech industries appear to be important 

in contributing to high rates of entrepreneurship 

in Silicon Valley, but entrepreneurship in other 

industries comprises the bulk of total entrepreneurship in the area.

• The rest of California and several large metropolitan statistical areas had higher rates of 

entrepreneurship than Silicon Valley during the 

late 1990s.

• Controlling for differences in demographic 

characteristics, previous employment status, and 

industry concentrations, Silicon Valley had higher 

rates of entrepreneurship than the rest of the 

United States during the late 1990s. 

• Residents of Silicon Valley are more likely 

to be immigrants and more highly educated than 

the rest of the United States, but are less likely to 

own homes and be unemployed, all of which are 

important determinants of business creation.

• Controlling for changes in demographic characteristics, unemployment, and industry composition, entrepreneurship rates in Silicon Valley 

increased by 0.034 percentage points from the 

late 1990s to the post-boom period relative to the 

trend in the U.S. entrepreneurship rate.

March 2007 No. 296
Data Sources

Entrepreneurship rates are estimated using microdata matched monthly files from the Current 

Population Survey (CPS) for the time period 

1996–2005. The mid to late 1990s period has been 

chosen and defined as the economic boom period, 

and early 2000s to 2005 has been defined as the 

post-boom period. 

Entrepreneurship rate is defined in this study 

as the percent of the population of non-business 

owners that start a business each month. This survey is conducted by the U.S. Bureau of the Census 

and the U.S. Bureau of Labor Statistics, and is 

representative of the U.S. population. Matching 

the monthly files allows for all new business owners both incorporated and unincorporated as well 

as those who are employers or non-employers to 

be captured. To estimate the entrepreneurship 

rate, all observations with allocated labor force 

status, class of worker, and hours worked variables 

are excluded from the sample. 

This report was peer-reviewed consistent with 

Advocacy’s data quality guidelines. More information on this process can be obtained by contacting the Director of Economic Research at 

advocacy@sba.gov or (202) 205-6533.

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