The Rise and Fall of Startups: Creation and Destruction of Revenue and Jobs by Young Companies

The Rise and Fall of Startups: Creation and Destruction of Revenue and Jobs by Young Companies

By
Antonio Davila, George Foster, Xiaobin He, Carlos Shimizu
Australian Journal of Management. February
2015, Vol. 40 , Issue 1, Pages 6-35

Using a large multi-country multi-industry sample of over 158,000 companies, the early-stage company sector is documented to have sizable destruction of revenues and jobs and as well as sizable gross creation of revenues and jobs. The creation aspect has captured the dominant attention of researchers, commentators, and policy makers. Destruction, despite its large magnitude, has long been a backwater of research and most commentary on this sector. Destruction is not simply non-growth but rather prior growth that is subsequently reversed. This paper analyzes creation and destruction evidence across 10 different countries and across eight different major industry groups. Yearly growth/decline rates using revenues and headcount for Years 2 to 5 are analyzed. In each of the three growth years examined there are large amounts of destruction as well as creation simultaneously occurring. For example, in Year 5 gross revenue destruction is 34% of gross revenue creation whilst gross job destruction is 65% of gross job creation. A small percentage of companies accounts for a large percentage of the total job and revenue destruction each year. This small percentage of large destroyers is especially interesting because they had to have had, by necessity, prior sizable creation. This rapid rise and subsequent rapid fall has been very much ignored in the research literature. Regression analysis highlights this aspect for the sample of destroyers. The diverse sources of revenue and job destruction are discussed and potential fruitful research directions highlighted.